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FRAMINGHAM (03/15/2000) - The Company: Cybersettle.comFounded January 1996Website launched August 1998Location New York CityLeadership James Burchetta, chairman and co-CEO; Charles Brofman, president and co-CEO Employees 120Mission To quickly settle monetary disputes in insurance and commercial claims Progress 10,000 claims registered in first 17 months of operations; about 4,000 claims settled by late 1999 Ownership structure Private corporation; founders include Kaye Group, XL Capital and others URL www.cybersettle.com For Gail Koff, founding and managing partner of Jacoby & Meyers, a New York City-based national personal-injury law firm, settling the majority of insurance claims her firm handles is, in theory, a simple matter of agreeing on a figure. Rear-end collision and a sore neck? How about $20,000? Icy steps and a fractured wrist? $12,000 should do it.

If only it were so simple in practice.

"There's this traditional dance that's expected in negotiations," Koff says.

"Neither side is able to come right out and ask for what they want." Because of the growing number of court cases, disputed claims can take two to three years to come to trial, and negotiations rarely get serious until just before the court date. When combined with the problems imposed by claims adjusters' higher workloads and attorneys' busy schedules, Koff finds it surprising that any cases ever get settled.

Yet one web-based startup is promising to eliminate some of the frustration with its automated negotiating process. Cybersettle.com offers an online service that acts as a blind intermediary, allowing insurers and their claimants to simultaneously make confidential offers and demands and potentially settle their claims within hours or days instead of months.

When attorneys James Burchetta and Charles Brofman announced their plans to create a web-based insurance settlement service in 1996, their friends, colleagues and even their families feared they had succumbed to a "let's-do-an-internet-IPO" midlife crisis. Nevertheless, the two founded Cybersettle.com that winter, using up every asset and loan they had and calling in every favor, raising nearly $2 million to fund the startup. An additional $600,000 investment from the Kaye Group, an insurance company in New York City, helped boost the company's finances in early 1998, and gave it the confidence to launch its website in August of that year.

"Everyone we knew thought we were nuts," recalls Brofman, Cybersettle.com's president and co-CEO. "Few people really believed in the internet then, and fewer could see the potential for business-to-business applications like ours to flourish."

But nobody calls the pair screwballs today. Their nascent company, which now employs 120 people, has established relationships with 11 major insurance companies and an exclusive relationship with Jacoby & Meyers. Its biggest client coup came with the signing of a three-year contract to handle 15,000 claims annually for The Robert Plan, a large Bethpage, N.Y.-based insurance claims administrator.

Burchetta and Brofman aren't your typical web entrepreneurs. Both had their own law firms before they joined forces in 1994. Burchetta joined and then ran his father's law practice in Carmel, N.Y., specializing in personal-injury law.

Brofman, who had been an assistant district attorney in the Bronx in the early 1980s, later started his own practice in Carmel, where he often negotiated with Burchetta or faced him in court.

The idea for Cybersettle came in 1994, as the pair opposed each other in a garden-variety auto-accident claim. Brofman suggested they each jot down a settlement figure they would accept, then hand the pieces of paper to a court clerk they both knew. If the offers were within $1,000 of each other, the clerk was to give a thumbs-up sign and reveal the amounts. If they weren't, they would shred the offers and start over. So each carefully jotted a figure, then handed the slips of paper to a clerk. The clerk compared them, grinned and gave the thumbs-up. Brofman and Burchetta settled the case that day for $12,000.

Cybersettle's process works much the same way, except automatically and online.

One party in a dispute--an insurance company, for instance--registers the claim on Cybersettle's password-protected system, including three confidential offers for settlement, to be offered in rounds. The system sends an e-mail, a fax and a letter alerting the other party--an attorney for a person injured in a car wreck, for example--that they can negotiate online. If the opposing side chooses to participate, its representative enters its three settlement demands, again confidentially. If Cybersettle determines that the amounts are within a percentage or dollar range that the parties have previously agreed to, the case automatically settles, and the parties split the difference. If Cybersettle doesn't work for them, the parties can go right back to the standard offline settlement process. For cases expected to involve less than $5,000, the system can be customized to settle for, say, amounts within 30 percent or $1,000 of each other.

Cybersettle's potential market is huge. More than 100 million property-casualty, auto and workers compensation insurance claims are generated in the United States each year. About 30 percent of those are contested, requiring one or both sides to hire lawyers, which slows the settlement process. As a result, a growing backlog of claims remains to be settled.

Business-to-business litigation claims, medical malpractice suits and other types of claims are also ballooning; Cybersettle can handle those as well.

Additionally, the company hopes to offer a new service for claimants sometime this year, replacing paper checks with a smart-card direct-deposit system.

If Cybersettle's services catch on, the company should develop a healthy cash flow fast. The firm charges insurance companies flat fees of $25 to register a case and another $75 if the other side of the dispute agrees to participate. If the case settles, each side pays another fee based on bottom line: $200 for settlements of more than $10,000, $150 for those between $5,000 and $10,000 and $100 for those below $5,000. Settling just 200,000 cases annually would earn Cybersettle roughly $100 million (assuming an average of $400 per settlement, plus an average of $50 apiece for another 200,000 to 400,000 cases that don't get settled).

Still in the startup phase, Cybersettle has had a minimal impact on its market so far. By the end of 1999, users had registered just 10,000 settlement offers on Cybersettle. The company, which remains privately held, says about 80 percent of its cases actually engage in negotiations; of those, about 35 percent to 40 percent settle.

The experience of some users, however, has been of lower settlement rates, though these early clients insist that as knowledge of the system has grown, a higher percentage of registered disputes have settled. Travelers Property & Casualty Insurance of Hartford, Conn., part of Citigroup, began piloting the Cybersettle.com system in New York City in 1997. Since then, the company has rolled out the system to its Midwestern, Western, and Southwestern property and casualty offices, training and authorizing adjusters to register and negotiate claims via Cybersettle's web-based service. Ray Lalo, assistant regional claims vice president in Travelers' Melville, N.Y., office, says the settlement rate on claims registered on Cybersettle hit 16 percent by November 1999. "At first, when we would register a case on Cybersettle, the plaintiff attorneys had never heard of the system and were suspicious of it. They thought it was our system, or they didn't trust the web encryption, or they just didn't like the process," Lalo says. "But as we've talked with attorneys, and they've gotten familiar with the system, our engagement rate and settlement rate have both gone up."

The actual number of claims settled also remains small: of the 1,841 cases registered, just 232 settled on the system, an overall rate of about 13 percent. However, Lalo says, the settlement amounts on Cybersettle, on average, paralleled those in cases settled the old-fashioned way; they just got wrapped up faster. "The big change is in the time savings. Cases are getting settled in five minutes instead of days and months," Lalo says.

Currently, only one other company offers a similar tool for settling financial disputes over non-web transactions and claims.

ClickNsettle.com, a subsidiary of NAM (National Arbitration and Mediation) Corp. of Great Neck, N.Y., started operation over the summer of 1999, using a blind settlement process similar to Cybersettle's. The company's core mediation business has lost money for the past three years, and its stock had been in the doldrums. The addition of the Click- Nsettle.com service, however, caused the company's stock to jump from less than $1 a share to more than $8 in August 1999.

Yet that fledgling competition may be in jeopardy, as Cybersettle makes an aggressive patent claim for its application of the blind-bid process on the internet. In November 1999, Cybersettle received a "notice of allowance" from the U.S. Patent Office, indicating that its patent would be granted in about six months. As a result, Cybersettle's executives are geared up to battle for their potentially lucrative marketplace, a struggle similar to the ongoing skirmish between Amazon.com and Barnesandnoble.com over Amazon.com's "1-Click" purchasing technology.

Roy Israel, chairman and CEO of NAM and ClickNsettle.com, insists that a Cybersettle patent won't keep his firm from staying in the market. "We have an entirely different settlement process and our own patent pending," he says.

Whether or not Cybersettle gets a patent, the company still maintains a large lead over ClickNsettle.com, which had only registered about 1,000 claims and helped settle 150 as of early December 1999. Meanwhile, it's not far-fetched to imagine Cybersettle registering several hundred thousand claims in 2000.

The company was scheduled to announce later this month that it had closed on a third round of venture capital with several financial and strategic investors, raising $30 million for new private shares representing about one-third of the company. The biggest prize, of course, is likely to be Cybersettle's initial public offering of its stock.

But the IPO won't hinge on profitability. Like most web entrepreneurs, they aren't overly concerned about operating in the black just yet. "We're investing everything we can in building this business," Burchetta says. "We're trying to revolutionize an industry, and that takes time."

Ian Springsteel, a freelance journalist based in Weston, Mass., can be reached at ispringsteel@earthlink.net.

EXPERT Analysis PUTTING JUDGMENT UP FOR AUCTION By Jeffrey Krivis Cybersettle.com is both a trap for the unwary and a blessing for the informed.

It's a trap because at its core, Cybersettle is a modified auction in which the bidders are trying to divide up a fixed pie. Whatever one side offers, the other takes away: a classic zero-sum game. Once in the auction, attorneys representing clients are likely to justify further participation by staying in the game. After all, it only takes a few more dollars to keep playing rather than miss out on a quick-and-dirty settlement opportunity.

But Cybersettle is also a blessing. It provides a simple and complete exit strategy for a stream of routine legal disputes, such as traffic accidents, where the amount in controversy is modest and the cost of proceeding to court is prohibitive. Many of these cases get resolved without any third-party intervention. However, for the cases that fall through the cracks, Cybersettle serves as an additional tool in the claims handler's toolbox.

This site will primarily serve insurance companies by more efficiently administering high-volume cookie-cutter disputes. Essentially, Cybersettle will use the age-old marketing strategy of advising insurers that the transaction costs of keeping a claim's file open will be reduced if they submit the case to Cybersettle. The ultimate goal, of course, will be a closed file.

The challenge: convincing plaintiffs' attorneys that this service actually benefits their clients, the true victims in this game of chance. From an ethical standpoint, the dilemma faced by lawyers is whether their clients are receiving adequate representation from a judicial formula cranked out by a microchip.

It's hard to imagine that a computer program could replace the human element, a key ingredient in any negotiation. Yet, with proper client consent, Cybersettle could fill a marketplace gap where the parties are already fairly close in their negotiations and are committed to compromise.

Cybersettle's application outside the routine disputes encountered by the insurance industry appears extremely limited. Generally, attorneys and their clients don't like giving up any control over negotiations. Even when they hit a stalemate, attorneys can always recommend private mediation with a professional neutral third party. That person can, like Cybersettle, serve as a confidential listener--but unlike the online service, a human mediator can also provide valuable verbal feedback.

Will Cybersettle succeed? I wouldn't want to invest my retirement account in it--but I still wish I had invented it.

Jeffrey Krivis is an attorney in Los Angeles who has mediated many complex employment and commercial cases online. He teaches at the Pepperdine University School of Law and serves on the board of directors of the International Academy of Mediators. He can be reached at jkrivis@mediate.com or through his First Mediation website at www.firstmediation.net.

CLICKNSETTLE.COM Great Neck, N.Y. Roy Israel, president and CEO NAM Corp., a national provider of alternative dispute resolution services, started ClickNsettle.com largely copying the model set out by Cybersettle.com.

Because NAM already had relationships with more than 3,000 insurers and law firms, adoption has been swift: In January 2000, the company had signed relationships with more than 250 insurance carriers and law firms. As of December 1999, ClickNsettle.com had registered 1,000 cases and settled 150.

Like Cybersettle, ClickNsettle.com requires that the offer and the demand be within 30 percent of each other to settle. But rather than limiting parties to three rounds, this company allows them to make an unlimited number of settlement bids over a 60-day period. Also, ClickNsettle.com gives users the option of submitting cases that do not settle online to NAM for an in-person arbitration or mediation, services that are billed separately at a standard rate.

Fees are slightly different as well. Registrants pay $15 to submit a claim; each side then pays $10 to $20 per round of negotiations on a sliding time-based scale. If a settlement is reached, each side pays $100 for amounts less than $10,000, and $200 for amounts greater than $10,000.

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