New Services Plans Ease Burdens of Legal System
When Andrea Loring, 36, gave birth to her daughter Asha, she decided that as a single mother she needed a will.
Finding a lawyer was no problem because the Miami school principal had opted for a prepaid legal services plan as one of her optional fringe benefits. From the list of area attorneys provided by Midwest Legal Services, the largest marketer of such plans, Loring selected Laurie K. Amber.
“I wanted a woman because I felt I could communicate better,” Loring said. “I walked in with my 6-week-old baby and found her nine months’ pregnant. She said, ‘I have never even held one before!’ So she held my baby and we talked.”
Amber, who with her husband and law partner Henry M. Amber contracts with Midwest to provide legal services for Dade County school employees, prepared the will. She also handled the closing and other real estate matters when Loring sold her small condominium and bought a town house. When Loring wanted out of her health club membership, Amber examined the contract and told her to forget it, that she couldn’t win that one.
This instant access to legal service costs Loring nothing.
She is one of an estimated 17 million people in the United States now covered by a prepaid legal service plan--a remarkable growth over the 1.5 million who had signed up for the embryonic plans a decade ago. If “free” plans (those without premiums) are included, a total of 30 million people now have some assurance of financial relief in the event of a sudden legal problem.
So far there are no indications that plan members abuse the legal system by filing large numbers of lawsuits. Studies by various providers show that legal plans are most used for the same kind of things people have always paid lawyers to handle--family law including divorce and adoption, real estate transactions, wills, and personal injury and worker’s compensation claims.
“There is a psychological, emotional and time burden involved in pursuing any kind of legal claim. No reasonable person wants to pursue legal disputes any more than necessary,” said Richard Scupi, director of United Automobile Workers Legal Service Plans, who said that only 40% of the 900,000 covered UAW members use the benefit in any way, including phoning in for legal advice.
Legal service plans have come a long way since the 1920s, when hunters and automobile racers in France sought insurance to defend themselves from suits over wounded cows and run-over flocks of geese.
Today, the plans still free people from the fear of expensive legal bills. But they also help them find knowledgeable lawyers, and encourage preventive law, which benefits employees, employers and the backlogged court system.
The plans have become more available and the number of clients has ballooned in the last few years as government restrictions have decreased and word of the service has spread. Midwest’s Des Moines-based vice president and general counsel, Patrick Maxwell, said his company, which is underwritten by Midwest Mutual Insurance Co. and serves all states, doubled its business in the last two years and expects to double it again in the next two years.
Dorothy Mason, underwriting consultant who heads Group Legal Services for Prudential, based in Roseland, N.J., the only major insurance company marketing legal coverage, said their business doubled last year and that “conservatively” it will increase by 75% in 1988 as they expand from 24 states to 36.
And Don Caldwell, president of Caldwell Prepaid Legal Ltd. in Sacramento, a pioneer in legal plans for 20 years who, unlike Midwest and Prudential, markets to individuals as well as groups in 44 states, doubled his business last year and hopes to triple it in 1988.
“This will not level out,” predicted William Bolger, executive director of the nonprofit National Resource Center for Consumers of Legal Services, “until every person in the country has at least one legal services plan.”
Bolger estimates that fewer than three-dozen companies now market prepaid legal plans. But the field is getting increasingly competitive with the entry of such massive sales entities as Montgomery Ward and Amway.
Spurred by Ruling
Originally opposed by individual lawyers and state bar associations, the plans struggled for survival until 1972, when a U.S. Supreme Court decision on behalf of unions held that lawyers’ organizations could not prohibit them.
About the same time, union and consumer lawyers were searching for ways to provide legal services to middle-income citizens who could neither afford to pay lawyers nor qualify for free poverty law services. Their meetings resulted in the nonprofit Washington-based National Resource Center for Consumers of Legal Services. The center lobbied to change the Taft-Hartley Act to permit collective bargaining for legal service benefits and to change the Internal Revenue Service Code to exempt employer contributions from taxation. It still works to make laws and regulations amenable to the plans.
Scupi, who set up the UAW plans, said union leaders recognized the need for legal plans as they came up through the ranks trying to help their members. They saw that union members had problems requiring solution by lawyers, but felt shut out of the legal system because of the expense and their ignorance of how to hire lawyers. He said UAW leaders began passing resolutions calling for legal plans in 1970, but it took them seven years to change labor laws and wear down lawyers’ resistance. The union negotiated its first plan for Chrysler employees in 1977.
The American Bar Assn., agreeing that the plans could spur use of attorneys by middle-income people who have avoided lawyers in the past, endorsed the idea and set up the Chicago-based American Prepaid Legal Services Institute, which has become a trade association for the plans.
$10-a-Month Plan
Since their origins as union-negotiated fringe benefits or lawyers’ agreements with local clubs, the plans have evolved into sophisticated arrangements among businesses and lawyers. Hyatt Legal Services, one of the legal “clinics” offering low-cost legal work across the country, is now offering a $10-a-month Lawplan to holders of Citibank credit cards. And Midwest has contracted with the granddaddy of legal clinic chains, Jacoby & Meyers, to deliver clients to its lawyers.
Proponents of prepaid plans, which cost from about $70 to $180 a year, have little use for “free” plans. But Bolger says the premium-free plans have their place in delivering legal services to the middle class.
His nonprofit National Resource Center administers a free plan set up early in 1987 by the AFL-CIO, which matches about 500 willing law firms across the country with several million potential clients.
“In a free plan,” Bolger explained, “members pay nothing. Nobody pays anybody anything.”
Actually, the client pays the lawyer, just as he would if no plan existed. But he pays less. Under a free plan, lawyers agree to discount their normal fees by 25 to 30% if a union or other organization refers its members to them.
Bottom Line
Many lawyers prefer the free plans to prepaid plans because it means more money per client. A lawyer who normally charges $150 an hour can charge a free-plan client $120 while most prepaid plans limit his fees to $45 to $60 an hour.
Under prepaid plans, someone--employer, union, individual--pays a premium in exchange for a series of services, commonly including:
- Unlimited advice by telephone from a law firm contracting with the provider or legal services offices set up in each state or area by the provider.
- Referral to an attorney for limited free consultation and limited free services like a will, review of documents such as sales contracts, letters to third parties, or an uncontested divorce.
Providers believe that when all the experimentation is over, most plans will be of the prepaid group type, although Midwest intends to test-market a plan for individuals in Los Angeles and San Diego early in 1988. Free plans, they say, do not provide enough benefits to satisfy the consumer.
The problem with individual plans is that premiums must be higher. A group plan can reduce the cost per member because the risk of pay-out is spread--only an estimated 10% to 40% will actually use it. Under providers’ “adverse usage” theory, all individuals who buy separate policies likely are contemplating some legal action to take advantage of the benefits.
Worst-Case Scenario
“If everyone who buys a policy gets a divorce right away, we would go broke,” Maxwell said.
Group prepaid plans include:
- Automatic enrollment plans, in which premiums are paid by the employer and all employees are covered.
- A “cafeteria” plan, in which employees have a choice of fully paid benefits and can opt for legal coverage rather than, say, a free annual physical, as Loring did in the Dade County School District.
- A voluntary plan, in which an employer or credit card company makes the plan available for those who want to pay for it, such as the one Midwest is now offering the 80,000 employees of the University of California.
Maxwell of Midwest said that 60% to 80% of employees typically choose legal coverage in a “cafeteria” benefit plan. In a voluntary plan, he said, about 5% of employees initially sign up, with the number doubling over the next couple of years as information spreads by word of mouth, topping out at about 20%.
For those who do sign up, or use employer-paid plans, the most obvious benefit is cost.
“The free service is so comforting to me,” said Loring, the Miami school principal. “I feel more secure knowing that if I come on a legal problem, I am not going to be financially devastated.”
Expense, Confusion
Studies by the American Bar Foundation, research arm of the American Bar Assn., show the principal reasons that most people avoid lawyers are fear of expense and confusion or ignorance about how to find the right lawyer for a particular problem.
“What any kind of legal services plan does,” Bolger said, “is, one, take away the fear of cost and, two, it does a lot of the shopping for you.”
Karen Leichtnam, legislative representative for the Washington-based legal consumer organization HALT, agreed, noting that HALT approves of the plans and intends to do a comparative rating of them next year.
“Anything that makes it easier for the consumer to evaluate a lawyer is good,” she said.
Employers also benefit when workers know they can depend on quick advice from a qualified attorney without high expense, said Alec M. Schwartz, executive director of the American Prepaid Legal Services Institute.
“Legal problems kind of hang on to you. They take your mind, if not your body, away from the workplace,” he said. “So if a lawyer can deal with a problem very simply, that may keep you on the job.”
But perhaps the most valuable benefit of the plans to the justice system as well as to clients and insurance providers is that they encourage “preventive law,” the solving of problems before they get to court.
Heading Off Problems
“The bulk of what we do with these clients,” said Miami attorney Amber, “is legal advice and correspondence. We end up solving the problem for them before it escalates.”
Lawyers and the plan providers who pay them say that 75% to 80% of the matters brought to them do not require costly, time-consuming lawsuits.
Schwartz and Bolger say lawyers who get involved with the plans are solo practitioners or working out of offices with one to 10 attorneys. Larger firms rarely serve individuals anyway, preferring corporate clients, and don’t need the extra business.
The trade and lobbying groups say legal plans are an easy and inexpensive way for a lawyer to increase a client base. Even if legal plan members pay reduced fees, they are usually satisfied customers and often refer their friends to the attorney or bring him their own large personal-injury cases on contingency, for which he collects a third to 40% of the award.
Even though the plans mean more potential clients, lawyers see them as anything but automatic gold mines.
“It is sort of halfway between being paid and doing pro bono (free work for those who can’t afford it),” said Richard Herz, a San Jose solo family law practitioner who normally bills at $150 an hour but has accepted $45 to $60 hourly for UAW members and now discounts his fee by 30% for AFL-CIO members.
Herz said his chief motivation is to be of service to union people.
Volume Theory
Santa Ana solo practitioner Jan Mark Dudman, who has done family law and personal-injury cases for several legal plans, said promoters’ claims that lawyers make up the fee reductions in the volume of legal plan clients is as silly as the old joke about the haberdasher who lost $10 on every shirt he sold but made it up on volume.
A lawyer who contracts with a legal plan provider for a small sum per client in exchange for the free telephone or office consultation, he said, also risks being inundated with phone calls and appointments that never add up to paying cases.
But Dudman speaks for many lawyers in explaining that he works with the plans because he enjoys helping people who ordinarily might not consult a lawyer, and because legal plans are “the future for law.”
One financial benefit for the lawyers, said Miami attorney Evan Byer, is that most of the insurance providers are more reliable about paying their bills than non-covered clients.
“You are not making a fortune because you are not being paid that great,” Byer said, “but you know you are going to be paid.”
Although the Ambers in Miami estimate that legal plan clients supply about half their business, most lawyers, like Walter Janoff of the Carson firm Janoff, Carpel & Cowan, say the plans yield closer to 10% of their caseloads. Caldwell says each of the 1,600 law firms servicing his plans throughout the country can expect about five referrals a year.
Threat From IRS
One cloud that has hovered over legal plans since their inception is an Internal Revenue Service threat to tax employer contributions to the plans as employee income. Although piecemeal exemptions have been granted regularly, the current one may not be renewed for tax year 1988.
But Bolger believes that, now that legal plans are catching on, even that possibility may not be a serious deterrent.
“One can argue that you might as well have no provision as one about to expire, which we’ve always had,” he said. “But since the average plan costs $100 a year, the tax would be $15 a year or less. So we don’t think that existing plans are going to fold.”
A few legal plans, including one by the long-established Bank of America, have been scuttled as unprofitable. But new companies willing to wade through the thicket of state regulations continue to scrutinize the burgeoning market. New plans, proponents believe, will be paired with other services like financial planning or family counseling.
“Most people today don’t know what a plan is and have never been offered the opportunity to enroll,” mused Bolger. “But that is changing fast.
“Within three years,” he predicted confidently, “most people will belong to a plan or have had the opportunity to enroll.”
“We are at the stage now that group medical insurance was at 25 years ago,” said Prudential’s Mason, who expects to spend the coming year living out of a suitcase as she markets the firm’s plan in 12 new states. “Everyone is predicting that 1988 is the year that legal services will really take off.”
