New defections in Australian insurance practices have caused further upheaval in a sector that is rapidly reshaping. As more partners leave full-service firms for firms solely dedicated to the practice area, the question arises whether insurance law is becoming a specialist's game

When ALB visits the sparkling new office of Kennedys in Sydney during the APEC week, we find it largely deserted. Many lawyers have observed the government's calls to stay away from the city during this hectic week and have taken the time off. Partner Mark Doepel says he hasn't found much hindrance from the APEC activities, apart from the distractions caused by the occasional Black Hawk helicopter that circles the building in front of the office.

London-headquartered Kennedys opened a branch in Sydney over a year ago, but it only recently completed the fit-out of its new premises on Park Street. The firm inhabits most of the 31st level of the Citigroup Centre, previously occupied by Sparke Helmore. Boxes with material from hearings are piled up against the wall awaiting a proper home and files can be spotted that still carry the name of Minter Ellison, where a number of Kennedys' partners have come from.

Doepel and the head of the Sydney office, Patrick George, make no secret of their motivations behind leaving Minter Ellison. They saw specialist firms benefiting from the pressure within large firms not to let the gap between hourly fees in insurance practices and similar practices, such as commercial litigation, get too wide. Focusing solely on insurance law, these firms were able to offer much more competitive rates than the practices within large firms.

"Insurers expect to pay about A$350 an hour," says George. "In large commercial firms a litigator would charge out A$600-plus, that is partner rates. The reason why those partner rates are so high as opposed to what insurers are expecting is because the overheads have just built up over years and years. It's very hard to economise or strip away those costs."

The debate on rates and the emergence of more insurance firms convinced Doepel and George that specialising was the way to go forward. But boutique wasn't their style. "The benefit for us in joining such a large firm as Kennedys was that we went up to an international level, rather than going down to these firms."

Charge-out rates
The issue of charge-out rates lies at the heart of the debate between specialist insurance firms and full-service firms with insurance practices. Historically, insurance lawyers have never been able to charge the same hourly fees as their colleagues in commercial litigation practices. Fundamental to this division is the high-volume, low-complexity nature of a substantial part of insurance work.

"We as a service provider are very conscious of the fact that in return for consistent volume of work, one needs to price one's rates accordingly," says Michael Pitt, national managing partner of Moray & Agnew. Charge-out rates have come under further pressure by consolidation in the industry, he adds. "There have been a contracting number of major players in the insurance industry in this country and that gives them greater buying power. They've increasingly applied pressure to keep rates at what they see as an economic level."

The continued pressure on rates has caused the gap between insurance fees and those in commercial litigation to widen, with insurance rates dropping to half or even less those of commercial litigation. The tension that has built up within full-service firms is starting to take its toll and has seen many lateral moves amongst insurance practices.

The most recent exodus of insurance lawyers has hit DLA Phillips Fox. Partners Simon Lusk and Tim Price have joined Yeldham Lloyd Associates in Sydney, followed by senior associates Dougal Langusch and Robert Finnigan. Meanwhile, partner Anthony Horan has decided to join the Bar in Melbourne. Partner Cain Jackson left to set up a Melbourne office for Phillip Wotton and David Kearney, who themselves are former Phillips Fox partners.

Many of the recently departed partners from DLA Phillips Fox have named pressure to up their rates as a reason to leave the firm. They fear an increase would price them out of the market. "The ability to deliver on clients' expectations in relation to cost was a factor," says Cain Jackson. Since his transfer to Wotton + Kearney he has lowered his rates. "They are more competitive, but I think clients would expect that, knowing that I'm going to a different cost base."

Smokescreen
DLA Phillips Fox says it remains committed to the insurance practice and points out that the departure of four partners is relatively small in comparison with the 40 it has in Australia and New Zealand. "In a team that large, there is always turnover," says Adrian Mitchell, head of insurance with DLA Phillips Fox.

Mitchell isn't convinced the issue of charge-out rates was the main reason for the partners to leave the firm. "I did ask them to articulate the reasons why they left, but all preferred not to discuss it," he says. "I have seen the talk about rates, but I have the internal perspective on the discussion that has been around rates [at DLA Phillips Fox] and I think any suggestion that we are pressuring them into increasing their charge-out rates to something like the corporate rates is a bit of a smokescreen."

He says the departures haven't resulted in a significant drop in work. "Ultimately, it's a decision for the clients who they would like to help them on their matters, but so far the indications that we have got from our clients is that DLA Phillips Fox will continue to receive work from them."

In the meantime, the firm has managed to attract new recruits, such as partner John Goulios, who has come from Ebsworth & Ebsworth, while last year it brought in partner Robert Crittenden from Moray & Agnew.

Counting the costs
The departures at DLA Phillips Fox might be small in comparison with the firm's activities, but there is undeniably a sense of unease amongst insurance lawyers at full-service firms. The departures at Phillips Fox come shortly after last year's hiring spree, which saw insurance specialist Moray & Agnew raiding the Canberra and Newcastle offices of Hunt & Hunt and enlisting Herbert Greer & Rundle's insurance team, led by Bill Papastergiadis, in Melbourne.

The conflict between insurance partners and their colleagues in other practices within full-service firms is not new. Over the years, several boutiques have been established by partners disgruntled by the demands of commercial litigators in the firm. Some specialist firms have rapidly increased in size. These developments, however, have accelerated in the last two years as the insurance industry is at the bottom of its economic cycle, triggering a further scrutiny of expenditures, including legal costs.

"Cost is a big issue at the moment," says Colin Porter of TressCox Lawyers. "Coming from the UK, it's something that I find a bit of a shock. There is obviously everywhere pressure on hourly rates, but it seems to have been driven down to such a low level here that it's quite difficult to make a reasonable amount of income."

Porter was appointed by TressCox in 2005 to rebuild the firm's insurance practice. After the collapse of HIH Insurance in 2001, the firm lost one of its largest clients and saw a substantial part of its business vaporise. Currently, insurance makes up between 10-15% of the firm's revenues, while before the demise of HIH the level was at over half of total revenues. "My brief was pretty much to rebuild it and take it back to or beyond the strength that it used to be and that's what I've been trying to do since I've been here," Porter says.

The departure of experienced insurance partners to specialised firms where they can adopt lower charge-out fees could form a threat for insurance practices like Porter's, but he says the specialised model has its own flaws.

"I think the potential difficulty with the more boutique firms that have been set up, certainly for the more junior members of the team, is that they are more isolated from other types of business," he says. He suggests the lack of expertise in other practice areas can result in a case being drawn out much longer than it needs to be, leaving the client with higher bills. "Some insurers are more focused on the hourly rate than on the value for money, which is how you have to make the assessment," says Porter.

It's an opinion that is shared by Melbourne-based partner Peter Coats, head of the insurance and corporate risk practice of Minter Ellison. "The advantage a large firm has is that we've got experts in every field. If insurers go to a small boutique firm and they have, say, asbestos litigation, they might quote an hourly rate that is lower than a rate I quote, but they would take ten times as long to do it."

Court scales
Coats aims to achieve cost efficiencies for his clients by using fixed rates instead of hourly fees. "We charge hourly rates to less than 30% of our clients, because they are saying to us, we want to pay what it is worth, we do not want to pay for how long it takes you."

He often makes use of the system of court scales in Victoria. "In a Supreme Court matter there is a scale cost for doing a defence, whereas firms that charge by the hour, they might spend a day on a defence and charge A$2,000 for the day. Under court scale I might get A$500 for however long it takes me."

Coats has been working for over six years with the fixed-fee model and says there are no pressures from within the firm to up his fees. "Management love us. I have to be careful for a lack of humility here, but the insurance and corporate risk is a very good and very profitable practice."

However, critics of the fixed fee-model say it reduces transparency, because clients can't see the correlation between the time that is spent on a matter and the cost involved. "Although I would know what it would cost me in a dollar rate, I don't know what that actually refers to in an hourly rate," says Mark Doepel.

Middle ground
Hunt & Hunt seems to be caught between the full-service and specialist model; it's a multi-discipline firm, but with a strong focus on insurance. Its analysis of the pros and cons of the different structures has brought it to its own conclusion.

"We have considered all these issues and that is why Hunt & Hunt has a third commercial, a third property and a third insurance, because it gives us a balance," says chairman Maureen Peatman. "We've decided we're staying in insurance for the long term, there is no question about that, but it does require you to operate more cleverly. There can be no sloppy practices; it's got to be a very tight ship that you run."

The firm added the NRMA practice of Abbott Tout early this year, after the latter merged with Home Wilkinson Lowry (HWL). HWL wasn't interested in the high-volume compulsory third party (CTP) insurance practice.

Peter Forbes-Smith, insurance partner in the Hobart office of Hunt & Hunt, says there is a misconception that boutique firms will get work done cheaper. "I can tell you they will get it done no cheaper, because if you're dealing with panel situations, we're all charging out the same rate."

Peatman says she doesn't apply pressure on insurance partners to up their fees to the level of the other partners in the firm. "We understand that when we tender, we tender at a particular rate. We can't then just say to the partner, 'Well, sorry Peter Forbes-Smith, but your rates are not high enough.' That would not be fair."

A long term perspective
Queensland-based firm Carter Newell has an insurance practice that represents about 50-60% of the firm's total income. Chief executive Peter Ellender says he sees the firm's future as a specialist, but is also convinced a firm needs additional practices to create enough critical mass to be able to invest in the business. "We certainly position ourselves in that specialist area within the insurance industry rather than just the broad market," he says. "You need to have the specialist skills, but also the capacity, infrastructure and depth to truly service these clients."

Ellender believes stability is the key to success. "Insurers are very professional purchasers of insurance services and do so on a very regular and ongoing basis. Therefore, we have to have a long-term view of the value that we bring to their businesses. It's that understanding about the supply chain and industry cycles that allows us to provide the stability and continuity in those companies without the issues that some of the other major firms might go through from time to time."

Consolidation
The focus of this article has been on the issue of charge-out rates, because it is probably the most dominant theme in the current discussions in the specialist versus full-service firm debate, but there are many other reasons for insurance partners to join a specialist environment. Partners have named commercial conflicts, investment in technology and a growing internationalisation of the insurance industry as other reasons.

Personal motivations behind a lateral move should not be factored out either; the opportunity to open an office, receive a higher salary or just a change of scenery are just a few examples of reasons lawyers move around.

The answer to the question of what the best home is for an insurance practice is therefore not easily answered - there are many different ways to approach the insurance industry. Desiree Scholtz, manager of insurance industry strategy at Sparke Helmore, explains that an insurance practice can exist very comfortably next to other practice areas as long as the firm recognises it differs in many ways from other practices.

"You need to develop different management structures and different gearing models to deliver profitability, depending on the nature of the work. For example, we could introduce a geared model to enable us to do insurance litigation work profitably where the raw hourly rates wouldn't be the equivalent of something we can do in a commercial sphere. It's all about how you do the work."

Scholtz estimates that the insurance practice represents over 50% of Sparke Helmore's total revenues and says it will remain a significant part of the business in the near future. "We have just recently undertaken a review of our strategic plans going through 2010 and have reinforced our commitment to the insurance industry."

Most players in the industry don't expect to see additional specialist insurance firms being added to the existing register in the near future. "Since the tort reforms, the legal industry has shrunk, but I think that is all over now. The players that are in the game now will probably be there in ten years time," says Maureen Peatman.

Going forward, it is more likely the industry will see a period of consolidation, says Peter Ellender. "I can see the plaintiff side consolidating through Slater & Gordon and the likes," he says. "It will make the industry more streamlined and increase its sophistication."

Insurance specialist of 2006: Ebsworth & Ebsworth

Ebsworth & Ebsworth took home the title of IC Frith/AIG Insurance specialist law firm of the year at the ALB Awards this year.

The firm has pushed itself to the forefront of the industry by financially integrating its offices in Sydney, Melbourne and Brisbane, investing in technology and adding to its profile through relocation of offices to premier locations. The strategy has paid off as the firm announced a 20% revenue increase last financial year.

Recently, the firm attracted attention with its involvement in the A$3bn Aurukun Bauxite Project in Western Cape York. It advised traditional landowners on an Indigenous land use agreement in relation to the project. It was the first time that native title-holders have negotiated an agreement of this kind for the feasibility stage of a major mining project.

Ebsworth & Ebsworth, which consists of 55 partners and 325 staff, saw a change of leadership in November 2006, when Mike Watson took over the reigns from Michael Ryan as CEO.

Insurance law, anyone?

The lower hourly rates and the tensions in large law firms between the insurance practice and other practices have had an effect on the popularity of insurance law amongst graduates. To say that insurance practices are not the first stop for recent law graduates would be an understatement.

What's more, many lawyer are looking for ways to get out of the sector, says associate director Jenny Bourke of Cicero. "Many of them feel pigeonholed; they look for more general experience and experience that is more marketable."

Commercial litigation is the obvious destination and with additional training, insurance lawyers should be able to make the transfer. However, law firms are hesitant to hire insurance lawyers in their general litigation practices. "It's difficult to get out," says Bourke.

The in-house industry doesn't provide any solace for insurance specialists. "More in-house lawyers in the insurance industry want to go back to private practice," she says. "They feel their skills are getting stale, that they are losing legal skills."

Many corporate lawyers find themselves doing increasingly more managerial work or uninspiring routine work instead of dealing with high-end legal matters. Insurance companies also bring more work back in-house, resulting in a high workload for the legal team. "There is not as much work-life balance as [candidates] expect there to be."

Technological needs: a case study

When the tort reforms of 2001 and 2002 substantially reduced the amount of insurance litigation work, many firms had to cut costs in order to remain competitive. Moray & Agnew decided to leave their King Street (Sydney) premises and move into a much more affordable office on Castlereagh Street.

One area where the firm didn't cut costs was IT. It invested A$4m on technology six years ago, when it established its first interstate office in Queensland. "We've invested a large amount in IT - practice management systems and the like - that increasingly enables us to provide at an effective cost," says Michael Pitt, national managing partner of Moray & Agnew. "We run all our IT, all our accounts, all our management, all our HR and marketing from our Sydney offices, so it greatly reduces the overhead in our other branches."

Pitt says technology is also fundamental in meeting clients' needs: "All insurers these days want periodic reports which encapsulate all kinds of information about a case." Many insurance firms now require a law firm to be able to provide them with two or three monthly updates on matters.

He believes the demand for technology will only increase. "We will get to a state where insurers want to use the extranet facility to proceed to paperless claims management and have access to our system," he says. "We have technology in place to provide that service."

This determination to be at the forefront of technological developments helps attract lawyers to the firm. For Bill Papastergiadis it was one of the reasons that contributed to his decision to leave Herbert Greer & Rundle last year and join Moray & Agnew's Melbourne office.