I recently chatted with Noah Waisberg, co-founder and CEO of Zuva, an M&A contract analysis firm. Noah was kind enough to give me a copy of the book he and Dr. Alexander Hudek recently authored AI For Lawyers, which is an excellent read.

In his book, Waisberg and Hudek talks about something called the Jevons Paradox. The Jevons Paradox is that generally speaking, when the price of a good or service comes down, consumption of it will typically go up. Waisberg and Hudek postulate that the same should be true for legal. As automation, AI, and Gen AI reduce the cost of legal services, there should be more cases brought. 

In my view, that means greater demand for legal services. More demand should mean more revenue and profit for the providers of legal services.

The Paradox and Insurance Defense

I have been thinking about the Jevons Paradox and its applicability to insurance defense, an area of law with which I had some experience. (Insurance defense work is the defense of an entity that is insured. The carrier pays the cost of the defense. There are typically limits to the carriers’ liability exposure, however, leaving the insured at some risk). 

As a general matter, most insurance adjusters who work for carriers and with outside lawyers in these cases are highly skilled. They appreciate high-quality legal work from their legal providers. They like dealing with professional, knowledgeable, and savvy lawyers. It makes their jobs easier and improves the results in individual cases. It helps them determine appropriate reserves and get good results.

The Problems Facing Insurance Defense Lawyers

The problem, however, is that the hourly rates of high quality lawyers are often too high for the carriers to accept except for large exposure cases. The carriers believe that, on an overall cost basis, the savings from lower hourly rates of C grade lawyers will more than offset the increased liability of the claims due to lower quality handling. The carriers understand that they pay more to resolve the cases but less in legal fees. It simply doesn’t matter, though, that the lower cost lawyers often don’t provide the same level of expertise and service. The more the hourly rates and legal bills can be reduced, the better.

The result is that even many high-quality lawyers are becoming reluctant to take insurance defense cases

Add to this is the constant micro scrutiny by the carrier of legal bills in general that can result in significant write-offs. Some carriers are notoriously slow to pay bills and constantly demand discounts. The result is that even many high-quality lawyers are becoming reluctant to take insurance defense cases. The better lawyers are reportedly moving out of insurance defense altogether: one well-known insurance defense firm, Gordan Rees, is reportedly repositioning itself away from insurance defense. 

And younger lawyers simply don’t have much zeal to work on insurance defense cases. Like more experienced lawyers, they reportedly don’t want to face the aggressive bill auditing, exceptions, and cost constraints of many insurance carriers. Like more experienced lawyers, they too face reduced compensation for all the headaches.

But at the same time, the number of insurance defense matters is increasing, according to a recent article. More work, fewer people to do it, and less compensation. It’s not a pretty picture.

It’s tough to be an insurance defense lawyer these days. 

The Nuclear Verdict Threat

Let’s also not forget the increased threat of so-called nuclear verdicts (verdicts that far exceed the expected or typical compensation in similar cases and are often more than $10 million). The threat of nuclear verdicts exponentially increases the stress on insurance defense lawyers. Insurance defense lawyers actually represent the insured, not the carrier. 

If there is a threat of a nuclear verdict, and the carrier constrains or will not pay for work the lawyer believes needs to be done to protect the insured from exposure beyond the policy limits, the lawyer is placed in an impossible situation. The lawyers I’ve talked to say that carriers often poo-poo the nuclear verdict threat. They often push hard to limit costs to the point that lawyers worry about their ethical responsibilities. Moreover, to state the obvious, the threat of a nuclear verdict increases when a C lawyer instead of an A lawyer handles the matter.

Add to all this is the pressure placed on lawyers who do insurance defense work by their firms to be more profitable.

It’s tough to be an insurance defense lawyer these days. 

Jevons Paradox Should Apply

I talked with Waisberg about Jevons Paradox and its applicability to insurance defense. Waisberg believes AI, automation, and Gen AI will reduce the cost of legal services, prompting more cases. That in and of itself, says Waisberg, will increase the sheer number of cases going to insurance defense lawyers.

The Jevons Paradox should enable defense lawyers to reduce the costs and thereby get more work

But the logical extension of Jevons Paradox should enable defense lawyers to reduce the costs of case handling perhaps dramatically and thereby get more work. Well-known insurance defense Frank Ramos of Miami agrees: “Those defense firms who go all in on AI will be able to reduce the number of hours it takes them to handle matters.”  Ramos thinks this will ultimately lead the good insurance defense firms to move to a more flat fee business model. Flat fees would lead to fewer hours, thinks Ramos but firms will make it up by having more cases.

 This reduction in the overall costs of higher end lawyers should prompt carriers to send more work to these lawyers than before, even work that was previously referred to the lower hourly rate lawyers. More work for better lawyers and increased profitability. Lower overall costs and better results for the carrier. Happier adjusters. When you throw in the possibility for more flat fee type charges and the reduced threat of nuclear verdicts, it sounds like a win-win.

So What’s the Problem?

Jevons paradox hasn’t yet worked for insurance defense for two reasons. First the insurance defense lawyers: they are typically slower to adopt technological changes. Many come from smaller firms that lack the resources to purchase technological tools and train their lawyers how to use them. Their rates are already low and they are less profitable. The lawyers and firms that are earlier adopters, more often than not, don’t do insurance defense. 

Waisberg pointed out to me that lawyers with lower rates could upskill. That’s certainly possible but it would require an investment of money, time, and effort. These firms are already financially and time squeezed from all sides.

The bigger problem, though, may be with the carriers. When I first started doing insurance defense, it was a team sport. Carriers and adjusters understood that work needed to be done and that necessary work sometimes could be expensive to best serve the interests of the insured.

As time went on, however, the relationship between lawyer and carrier became more adversarial

As time went on, however, the relationship between lawyer and carrier became more adversarial. The carriers placed so much cost pressure on adjusters to hold down legal costs that it often became us versus them. The carriers became all about limiting rate increases, demanding discounted rates, and auditing and cutting bills left and right. 

Is Change Possible?

With this mindset, it’s hard to see carriers being willing to be innovative in how and to whom they refer work. Carriers are used to seeking cost reductions merely by referring work to lawyers with lower hourly rates. As a result, they may fail to see that lawyers with higher rates who adopt technology can save them money in the long run. By focusing only on the hourly rate, carriers fail to incentivize lawyers to look for ways to decrease overall costs. 

Waisberg did raise with me an interesting point, “if the Jevons Paradox dramatically increases the number of cases, insurance companies might find themselves spending a lot more than they have in the past for defense.” He wonders if that may prompt carriers to change and send more work to higher end lawyers simply because those lawyers can handle more due to technology efficiencies.

Good lawyers with higher rates willing to embrace technology to lower overall costs and handle more cases should receive more work, not less

Good lawyers with higher rates willing to embrace technology to lower overall costs and handle more cases should receive more work, not less. But the carriers may not be ready to recognize this. Add to this fact that consolidation of the insurance industry has resulted in a handful of very large carriers. It’s hard for big insurance companies to turn their ship quickly.

It may take a while for Jevons paradox to impact insurance defense.