Taking the Law into Your Own Hands

I n 1969, Harland Stonecipher was involved in an automobile accident. His car was totaled. He was hospitalized. He was sued by the other party and spent three-quarters of his annual income in legal fees. Being an insurance agent, Stonecipher was well protected for auto-replacement costs and medical bills. But when it came time to pay his legal costs, Stonecipher was out in the cold.

Amazed that none of his insurance polices covered legal expenses, he set out to find an alternative to paying attorneys out of pocket. Stonecipher researched the industry and found the solution in Europe. Since 1907, legal insurance had been as common in Western Europe as car or health insurance is in America today.

In 1972, Stonecipher opened the doors of Pre-Paid Legal Services to little fanfare. The company started with no members ... and no attorneys. He charged only $2.50 for membership and from a small amount of revenue had to hire a sales force, pay attorneys for their services and cover administrative costs.

His basic business model was one-third of the premium to the attorney, one-third to the sales force and one-third back to the company. He set up an 800 number, hired staff and set out to bring lawyers on board.

On those rare occasions when he actually found an attorney who liked his idea, he usually was greeted with laughter when he said Pre-Paid Legal didn't actually have any members yet. Who says lawyers don't have a sense of humor?

But Stonecipher's commitment to his vision coupled with his hard work eventually paid off. Today, Pre-Paid Legal Services, Inc. is a 29-year-old legal-services insurance provider traded on the New York Stock Exchange. Debt-free with approximately $60 million in cash and equivalents, Pre-Paid Legal's strong financial condition prompted the buyback of more than $65 million of its own stock in the year 2000.

"Our business philosophy is to level the playing field so that the average person in America can have access to an attorney without going broke," says Sunil Wadhwa, Senior Vice President of Pre-Paid Legal.

Staples.com, CNA Insurance, Conseco, Travelers Insurance, Primerica, and Fortis are some of the major companies that have added Pre-Paid Legal's services to their client portfolios.

The United States Government has given Pre-Paid Legal permission to offer its services to all of its federal employees as a benefit. Six state governments as well as many cities also offer Pre-Paid Legal's services as a benefit to their employees.

Major media publications such as Forbes, Success, INC Magazine, The Wall Street Journal, BusinessWeek, USA Today, Bloomberg Report and Salomon Smith Barney all have given kudos to Pre-Paid Legal. Fortune ranked Pre-Paid Legal 29th among its 100 fastest-growing companies in 2000.

What does all this mean to the ISO community? One word - revenue.

ISOs need a way to get a merchant to talk to them when they walk in off the street. Just saying, "I can get you a better rate on your credit card" won't do it. Pre-Paid Legal not only offers a viable option, it also promises an alternative to portfolio attrition. By offering legal services not available through any other avenue, ISOs can lock in their merchant accounts.

"ISOs are starving for sources to get them into merchants they're being kicked out of," says Wadhwa. "We're a value add-on to their services. We provide residual streams and, most importantly, give them the ability to go in the front door with a non-competitive product as opposed to credit card and payment processing services. We increase primary business and support their secondary business."

While its core competency has always been the family legal services plan, one of Pre-Paid Legal Services' hottest products is its business legal services plan. Geared toward merchants both large and small, these insurance plans offer extensive legal, business and marketing services to help grow and protect any small business.

Even home-based businesses are offered legal, marketing and business consultants on retainer to help grow and protect those home-centric companies.

Additionally, the corporate group benefits are becoming more and more in demand because, according to Pre-Paid Legal, they help increase the productivity of a company's workforce by reducing absenteeism and stress.

For the family plan, at a cost of $26 per month, each member receives six different categories or titles of coverage:

 Area 1 includes unlimited telephone consultation, correspondence, documentation and contract review for car, house, boat, personal injury, business, civil and criminal, even will preparation.

 Area 2 focuses on motor vehicle coverage. From moving violation to automobile accidents, attorney representation is provided from start to finish. Significant to this coverage is the fact that insurance companies do not pay for legal defense for criminal charges resulting from car accidents. If a member's driver's license is suspended, Pre-Paid Legal will negotiate for the insured on behalf of DMV and any claim for property or personal injury less than $2,000.

 Area 3 encompasses lawsuit protection for civil or work-related criminal charges. In the first year of coverage, each member will receive 75 hours of attorney representation with 17 1/2 hours allocated for pretrial time. For anything more than 75 hours, the member pays at a 25% discount. While the hours available to the member increase every year up to 335 hours for the fifth year, the premiums do not.

 Area 4 is for the dreaded IRS audit. The insured will receive 50 hours of tax attorney service, all-inclusive. After 50 hours, the insured pays for services at a 25% discount.

 Area 5 is a 25% discount category, the member preferred rate. This is a category Pre-Paid Legal Services is very proud of. For any comprehensive services that go beyond Areas 1 through 4, a 25% discount is applied.

 Area 6 is a legal shield. It gives members 24/7 attorney access.

For all of these plans, Pre-Paid Legal offers freedom of choice. "We make a recommendation, no absolutes," says Wadhwa.

"If you don't like them, you're on your own. Or you can call back with the reason you didn't like the attorney. If it is a legitimate reason, you'll get another attorney."

In addition to the family plan that Pre-Paid Legal markets to businesses, merchants can purchase business legal-services plans for $75 to $125 per month and group plans to the employees for $15.95/month.

As a new profit center for ISOs, Pre-Paid Legal compensation is lucrative and is paid on a daily basis. Commissions can be earned from several areas. ISOs are paid from $100 to $200 per sale depending on the sales level for the Family Plan.

For the Business Plans, the commission is $225 to $770 per sale, depending on sales level and type of plan sold. A $60 to $100 commission is paid per sale on the Group Plan. For example, if an ISO sells to just 50% of a company with 20 employees, that's 10 Group Plans or anywhere from $600 to $1,000 in commission.

In addition to the one-time fee paid upon signing, ISOs also receive residual income in the form of a monthly percentage of the premium. These monies also are paid immediately.

"We pay daily commission," says Wadhwa. "You don't have to wait 'til the end of the month to get the check. The same day the payment is processed, the check is in the mail to the ISO."

In addition to financial support, Pre-Paid Legal Services provides operational support to its agents. Fueled by a solid infrastructure, Pre-Paid Legal has a marketing services department that exclusively supports agents in the field.

"We have incredible ISO support," says Wadhwa. "We have a huge ISO dedicated staff. We have incredible tools that ISOs can purchase, such as cassette tapes, videotapes and CDs. We provide brochures free of charge to ISOs upon sale closures."

Training is another important component to Pre-Paid Legal's operation. An agent coming aboard is put through a one-day "Fast Start" training class.

A secondary three-hour training class, unique to Pre-Paid Legal, is offered for ISO certification on the business plan. A two-day training program enables ISOs to offer group benefits to merchants as well.

The Fast Start training class is free. The certification class costs $50, and the group-plan training is $125. Pre-Paid Legal offers local training classes and trainers nationwide. Pre-Paid Legal also provides online support. Its Web site offers ISOs the ability to sign members online. Membership goes into effect immediately; ISOs submit apps and, within 48 hours, the information is entered into Pre-Paid Legal's database. Membership goes into effect immediately.

Is there any special criterion for members? "If I put a mirror under your nose and it fogs up, you can become a member," Wadhwa says jokingly. Each member must be 18 years of age, be a credit card holder, have a checking account or pay the annual fee up front.

Pre-Paid Legal works across the board with a business as long as the business is legal. If for any reason an illegal issue arises after the fact, then Area 6 comes into play with that 25% discount for legal representation. With these services, Pre-Paid Legal becomes an effective door-opener for the ISO. With the massive amount of competition in the marketplace for banking products, Pre-Paid Legal gives ISOs an edge because it has no competition.

"For all intents and purposes, we absolutely do not have competition and don't think we ever will because it has taken us a very long time to establish this network of attorneys," says Wadhwa.

"We have a provider attorney network that no other company has, and without it you don't have anything."

That network is made up of the largest legal providers nationwide encompassing the largest firms in 38 states, including a 74-year-old firm in California, a 62-year-old firm in New York and a 60-year-old firm in Oregon. In Canada, it includes a 100-year-old firm in Toronto.

"We also have a slew of referral attorneys," says Wadhwa. "We've worked with 100,000 attorneys over the last 29 years, establishing relationships with 2,700 law firms."

Working with major players is key for Pre-Paid Legal Services, according to Wadhwa. "Main law firms are a critical point in the marketplace," says Wadhwa. "And we pay them an obscene amount of money."

In California alone, Pre-Paid Legal doles out $1 million per month and has 140,000 members. Nationwide membership is 1.3 million and includes 300,000 business owners.

How does Pre-Paid Legal Services maintain its quality control with so many suits running in and out of court? According to Wadhwa, all must be AV rated, the highest law firm ranking by the Martindale Hubbell Law Directory.

"Our attorneys must maintain this rating or they're out of our system," says Wadhwa.

Pre-Paid Legal surveys its legal partners regularly. As for surveying its members, Wadhwa says there is no need to. "Our service is month to month," he says. "If you're not happy, you'll cancel."

Another plus for ISOs is the size of the target market. Of the 25 million small businesses in North America, 95% have less than 100 employees, and there also are 45 million home-based businesses in North America.

Pre-Paid Legal has less than a 1% penetration into the small business/home-based business market. Pre-Paid believes that 100 million households have a need for its service as well, a belief based on this market research:

 Each year, approximately 900,000 businesses start up and approximately 800,000 go out of business.

 In 1980, there were 12 million lawsuits filed in the U.S.

 By 1995, court filings increased to more than 100 million in state courts alone, or three court cases filed every second.

 52% of Americans have a new or ongoing legal situation today, according to the American Bar Association.

With 30 consecutive quarters of increased earnings and growth, Pre-Paid Legal Services definitely has taken advantage of this market research and is betting on another 30 successful quarters, especially since there isn't another publicly traded company out there providing legal services. At the moment, there's no one else playing in the Pre-Paid sandbox.

That may change because, as Wadhwa admits, this is a brand new marketplace.

"It's very similar to what happened in Europe," says Wadhwa. "Last year in Germany, it became law that you couldn't get a driver's license without prepaid legal plan. That is where we're heading.

"We know it is a very bold statement, but we have seen the European market with 80% penetration. Here in the U.S., we are a litigious society, and it's all about money. We feel that litigation in this country will increase.

"Legal fees will increase, and the average person won't be able to afford it. Eventually, the majority of the population will have our membership. As one industry observer said about us, 'This is a sleeping giant of an industry, and Pre-Paid is helping to awaken it.' "

Pre-Paid Legal plans to meet that future with internal expansion as its membership base expands. It plans to increase its attorney bases and increase its sales force.

"All our sales force is independent," says Wadhwa. "We don't compete at all in the sales process with our agents. We didn't have the avenue to get to the ISO community. Now we do."

Pre-Paid Legal Services wants ISOs to think about where they would be today if they had sold car insurance or medical insurance when it first became available. Pre-Paid is offering them that scenario now.