A concerning trend in claims management and civil litigation that will have a major impact on insurance fraud is the emergence of “investments” in personal-injury litigation by third-party lenders. Traditionally, personal-injury attorneys finance suits from their own pocket. That includes costs of taking a personal-injury civil matter to trial. Filing fees, process servers, stenographers and expert fees are a risk borne by the plaintiff’s attorney.
Reimbursement is realized only if the suit is successful. Thus, before pursuing a claim/litigation, a personal-injury attorney has an incentive to carefully screen potential clients and their claims. If financing is required, attorneys obtain a loan from banks or other financial institutions, and use their personal assets as collateral. The lender has no financial stake in the claim or outcome of a lawsuit. Financing by a third party with a pecuniary interest in the outcome of the litigation is known as “champerty.” It is traditionally prohibited to discourage fraudulent or frivolous litigation.
In recent years, however, the financial industry has begun to monetize lawsuits and treat them as any other financial asset. Specifically, financial entities have begun a high-volume practice of issuing case-specific “nonrecourse” loans to claimants/plaintiffs and their lawyers.
Repayment is contingent only on procuring a settlement or judgment for the plaintiff. This emerging trend undoubtedly will encourage fraudulent or frivolous claims and lawsuits. It could have a major impact on insurers, the litigation process, and the ability to reach a negotiated settlement.
Litigation loans spreading
Third-party lenders of all types increasingly are venturing into the litigation “market.” They provide nonrecourse loans for specific claims or suits, for which the principal and interest is only due and payable from the proceeds of a settlement or judgment. This trend could encourage more fraud across all lines of insurance.
Some 28 percent of private practice attorneys report that their firm has used litigation financing.1 This is a 300 percent increase since 2013.2 Burford Capital reportedly issued $378 million in new investments in 2016 alone, and has over $2 billion in capital invested (or available for investing) in litigation financing.3 Burford says its income in the first half of 2017 exceeded all of 2016, indicating an industry in rapid growth.4 For smaller-scale litigation, high-volume litigation lenders advertise directly to lawyers. For example, Advocate Capital, which specializes in law firm financing, claims it has funded approximately 150,000 cases over the past 15 years.5 Counsel Financial reportedly has loaned more than $1.5 billion since 2000.6
“This trend could encourage more fraud across all lines of insurance.”
Lenders targeting claimants directly are just as prolific. They promise large amounts of money within days or even hours. Websites such as www.fast-low-cost-lawsuit-loans.com and www.settlementcashadvancenow.com are prime examples. SettlementCashAdvanceNow.com, for example, touts “4 Hour Express Funding,” promising “fast funding and same day approval of your settlement loan.” Oasis Financial promises claimants up to $100,000 “in your hands by 3:00 pm tomorrow,” with an application process that takes “seconds.”
Litigation loans supposedly permit claimants to pay day-to-day expenses and/or medical bills while the claim or lawsuit is pending, thus easing financial pressure to settle quickly for an unfavorable amount.7 These loans are issued with minimal due diligence by the lender, and have no restrictions on their use by the recipient. It is unclear whether the steps by lenders to verify these claims can protect them from risks such as identity fraud. Having money so easily attainable — essentially requiring only an open insurance claim — with no conditions, certainly will be a magnet for dishonest claimants looking for a quick buck.
These loans also accrue high, often predatory interest rates. Even a small, shorter loan can result in the recipient owing multiples of what was borrowed. Most states do not regulate these lending practices. Interest rates exceeding 100 percent per year are a reality.8 For example, a 9/11 first responder received an $18,000 advance on settlement funds for her claim, and accrued $15,000 of interest in just six months.9 The lender faces lawsuits by the New York Attorney General and the Consumer Financial Protection Bureau.
Easy loans invite fraud
The speed and ease with which nonrecourse litigation loans can be obtained, and lack of tangible collateral, is the equivalent of walking into a casino and being paid to place any bet on the roulette table. It doesn’t matter whether the wager wins — the bettor can’t lose, and has every reason to gamble.
Historically, the volume of fraudulent and frivolous claims submitted to insurers has been regulated by the risk and expense of pursuing such claims. Naturally, maintaining an insurance claim and litigation incurs a cost, including medical expenses, lost wages, attorney fees, plus litigation costs such as court filings, depositions and obtaining experts. As with the casino gamblers, receiving money simply by submitting a claim and without providing collateral drastically diminishes or eliminates the risk component of this evaluation.
“This ‘dark money’ will empower other scammers as well, including fraudulent medical build-up by providers.”
In theory, anyone can submit a claim to an insurance company alleging vague injuries from a slip-and-fall, low-speed staged crash or other scam, and quickly receive substantial amounts of loan money with no strings attached and minimal documentation. Litigation loans allow claimants to reap the rewards of a claim without meaningful scrutiny of its merits or value.
This obviously opens the door for dishonest claimants to fabricate or exaggerate losses solely to obtain a quick risk-free “loan.” This “dark money” will empower other scammers as well, including fraudulent medical build-up by providers and aggressive tactics by attorneys whose underhanded activities will be reinforced by money received from claimants. The allure of the large amounts of easy money also may entice organized crime rings that already engage heavily in insurance fraud such as staged crashes and healthcare schemes.
Attorneys will take on more cases
The increasing availability of third-party lenders and their willingness to “invest” in personal injury litigation undoubtedly will increase lawsuits filed and frivolous claims pursued. A personal-injury lawyer traditionally assumes the risk and costs of litigation, thus limiting the number and types of cases they handle. The prospect of virtually limitless loan funding contingent on the outcome of specific litigation provides such lawyers with resources to take on a higher volume of claims, regardless of their likelihood of success. This shifts the financial risk for bringing claims from claimants and their attorneys to third-party lenders. Being nonrecourse loans, they are secured only by proceeds of the claim settlement or judgment. The borrower does not have personal or business assets at risk.
With the costs and risks of litigation shifted more to third-party lenders, attorneys have more incentive to represent claimants with seemingly weak or potentially fraudulent claims. The quantity of attorney-represented claims faced by insurers is almost certain to increase as third-party litigation lending grows.
Trials protracted, defense costs rise
With reduced financial pressure on the plaintiffs and a war chest to finance litigation, cycle times for suits also will increase. This will result in more-protracted litigation and trials, and raise defense costs.
As with screening, the length of litigation traditionally is limited in part by plaintiffs and their attorney’s willingness to continue assuming costs of litigation in light of uncertain success. The plaintiff or attorney may conduct a cost-benefit analysis and choose not to engage in certain discovery acts, or file or contest certain motions, and could be amenable to negotiating a lower pre-trial settlement. Such factors work to benefit insurers with quick and favorable resolutions, and reduced overall defense costs.
“With reduced financial pressure on the plaintiffs and a war chest to finance litigation, cycle times for suits also will increase.”
Easily obtained litigation finance loans remove this barrier and will only extend litigation. This new war chest will allow counsel to engage in a scorched-earth approach to litigation without financial repercussions. The availability of funds does not depend on their efficient or practical use by counsel. The claimants, having loan money in their pockets, have less incentive to seek a speedy settlement and can allow litigation to linger and defense costs to stockpile. As a result, this financing will have significant repercussions on the number of suits filed and the duration these matters remain in litigation.
Loans drive up settlements
Settlement negotiations likewise will be significantly impacted on suits involving third-party nonrecourse loans. Such negotiations typically will consider the competing interests of the litigation parties. Introducing another party in interest, the lender, creates a dynamic that will impede resolutions and drive up case settlements.
Typically, a personal-injury suit’s value is at its highest when claimants submit a demand package. Most of the claimant’s evidence is untested because no discovery has occurred, and the insurer’s investigation has been restrained by limited access to witnesses and documentation. Over time, several factors may cause the plaintiff’s potential recovery to decline as the evidence is tested through discovery. For example, during litigation, evidence may suggest the alleged injury is not as severe or disabling as first believed. Prior or subsequent losses also may cast doubt over the causal connection between the event and the injury/treatment obtained.
Any of these discoveries would instantly reduce the insurer’s valuation of the claim. This valuation further diminishes as the insurer expends resources to investigate and defend the matter. Thus, the claim value should decrease from the insurer’s perspective as time passes.
For third-party lenders, time increases the claim’s value. As the length of the loan persists, the interest accumulates, requiring the claimant/plaintiff to obtain an ever-increasing settlement or award to compensate the lender. Add to this the monetary interests of the plaintiff, medical providers (via liens) and attorney fees, and suddenly the settlement dynamics are turned on their head. The facts of the claim become more attenuated, and the negotiations start to revolve around math more than merits. Naturally, this conflict will make settlement negotiations more contentious and resolution less likely. More claims will go into suit and be tried, further increasing insurers’ expenses. Many actions will involve fraudulent claims.
Loans obscure true party
The financial sector’s involvement in litigation through nonrecourse loans will continue to fundamentally alter standard personal-injury litigation, and cause a proliferation of fraudulent and frivolous claims. Settlements will become more costly as loans obscure who is the true party in interest in a claim or lawsuit.
There is little an insurer can do to combat the lender’s influence on litigation. If possible, claims adjusters and investigators should attempt to identify, as soon as possible, whether a lender is involved. Insurers also should remember that, in most jurisdictions, communications between the claimant/attorney and the lender are not privileged. Such communications therefore might be a source of valuable information during discovery about the case merits, alleged injuries and damages, the claimant’s veracity, and a number of other valuable factors.
“Insurers have no obligation to reimburse plaintiffs or their attorneys for costs of a litigation loan.”
Insurers face difficult choices. Resolving these matters with substantial settlements to avoid mounting costs and prolonged litigation can incentivize bad practices by claimants and other fraud perpetrators, thereby “feeding the beast.” Claims adjusters must remember that neither a litigation loan nor accrual of interest or fees provide any legal basis to determine whether to pay a claim or its settlement value. A claim should only be valued on its merits. Insurers have no obligation to reimburse plaintiffs or their attorneys for costs of a litigation loan. By strongly pushing back against improper attempts to include these expenses in claim negotiations, insurers can reduce their costs and issue a shot across the bow of future perpetrators.
Going forward, this controversial industry will continue to grow. Federal and state governments, however, are beginning to push back against rampant predatory lending. Eight states have enacted laws regulating these loans since 2007. They have capped interest rates, banned lenders from directly making decisions regarding the claim or settlement, and prohibited assigning the loan agreement to third parties.10 Likewise, state attorneys general are advocating for consumer rights against these practices, as with the litigation by the New York Attorney General.
While the future of these loans is uncertain, it is clear that insurers will continue to be damaged by their proliferation. Insurers should be aware of their existence, and lobby aggressively for favorable protections wherever possible.
About the authors: Adam Brand, left, is founder/managing partner and James Craig is an associate attorney at Brand & Tapply, LLC. The firm represents insurers nationwide in investigation, coverage and litigation of first- and third-party claims. Contact Mr. Brand at email@example.com and Mr. Craig at firstname.lastname@example.org.
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