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How Litigation Funds Are Affecting Lawsuits Against Insurance Companies – Forbes Advisor

How Litigation Funds Are Affecting Lawsuits Against Insurance Companies – Forbes Advisor

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This is what happens—monetarily—if you’re injured in a vehicle accident. When the other driver is at fault, that person’s insurance company usually offers you a settlement. You’ll want to negotiate if you consider it too low. If you still don’t agree with the insurer’s “final offer,” you can hire a lawyer, file suit and gear up for what could be a lengthy and expensive legal battle. It’s you against a multibillion-dollar company that has extensive experience in defending lawsuits.

But the playing field is changing. You and your attorney may no longer have to confront that insurance company alone. You could have a silent partner, a “litigation funder.”

This litigation funder may bankroll your legal case and might also provide support for your personal financial or medical needs while you’re going through it. In return you sign a “loan” that must be repaid—with interest—after you receive an insurance settlement.

Litigation funding—for lawsuits against all types of companies—is an estimated $39 billion worldwide industry, according to Bloomberg. It is centered in the U.S. and backed by Wall Street hedge funds. Some college endowments stake shares in litigation funds, attracted by the high margins of return, says Bloomberg. Internal rates of return from litigation funds have been 25% and up in recent years, according to a report by Swiss Re.

“There used to be just a couple of them,” says Jack Cohen, a Princeton, New Jersey, attorney who works for insurance companies. “Now we see them a lot.”

Shares of some litigation funders are even traded on the stock market, such as Burford Capital.

Insurance companies hate these funds. They believe their objective is to work behind the scenes to fleece insurance companies and charge usurious rates for their services.

“Litigation funding inflates settlements and cheapens our civil court system by allowing secret parties to have a stake in litigation,” says Bailey Aragorn of the American Tort Reform Association, a pro-insurance advocate.

Battling the Behemoth

Consumer advocates hail these litigation funders as a welcome ally in the battle against the trillion-dollar insurance industry.

“Those forced to file a lawsuit against an insurer on their own face a behemoth in resources and experience,” says Birny Birnbaum, head of the Center for Economic & Social Justice (CESJ).

At a time when people are injured—perhaps seriously—and possibly also unemployed, having a financial advocate “removes the insurer’s opportunity to bleed the injured party with a routine underpayment” of insurance settlements, says Robert Hunter, director of insurance for the Consumer Federation of America.

Others may need help from litigation funders to deal with the expenses of pre-trial motions, depositions and other costs.

And no law firm can offer personal financial assistance to a client facing hard times until the settlement comes in, such as the need for expensive medication.

But finding litigation funders may not be easy, or even possible, for the typical consumer. Your lawyer could bring the case to them, but some law firms don’t want to do so. Major law firms often have their own “war chest” to handle these expenses alone.

‘Judicial Hellholes’

When a litigation funder is offered a case, there’s no guarantee it will take it. Like a bank, it wants its funds repaid—with substantial interest. So the litigation fund will undertake a complicated analysis: How much is the plaintiff likely to receive from the insurer? How long will the case take? And is there a possible downside, such as losing or only getting a small insurance settlement?

In addition to economics there are human considerations. In what court will the case be tried? How hard is the insurance company likely to fight the lawsuit? Who are the attorneys on both sides and what are their reputations for courtroom hardball? Computer programs analyze all these factors, it’s not just guesswork.

Many litigation funds won’t even consider an individual’s injury case. Around the world, 75% of litigation investment goes to commercial litigation and large lawsuits such as class actions, according to Swiss Re. Class actions, often filed against large industries like pharmaceutical companies, can prove to be the most lucrative.

“That’s what the insurers are really griping about, class action suits following major corporate wrongdoing,” says Joanne Doroshow of the Center for Justice & Democracy.

No Robin Hoods

Insurance companies point out that litigation funders aren’t Robin Hoods. Like the attorney, they are paid for their services from the insurance settlement. The litigation fund industry expanded globally at a rapid rate of 16% in 2021, says Swiss Re.

While bank loans and credit card charges are regulated in most states, litigation loans are treated differently. The argument is that they are “non-recourse,” meaning that the borrower isn’t personally liable and the funders could lose their whole investment if these lawyers don’t win the case.

The interest rates charged on these unregulated loans is seldom revealed. But according to the New York Post, one New York City-based firm provided thousands of clients with funds at an interest rate of up to 124% a year. The litigation funder claimed in court papers that the money wasn’t a loan but a “contingent interest in the potential post-judgment proceeds” of the case, the newspaper said.

The Swiss Re study claims that litigation funds take a significant chunk of every settlement in which they are involved, ultimately leaving the plaintiff—the actual injured party—with only 43% of the settlement. The study also indicates that the case takes longer because of the fund’s presence, and could settle a year after non-litigation funded cases.

“They have a very big effect on how willing an attorney may be to settle a case,” says Cohen.

Litigation Funders Code

Jack Kelly, the managing director of the American Legal Finance Association (ALFA), which represents U.S. litigation funding companies that handle personal injury cases, says that his group of 45 litigation funders has a code that prevents its members from getting involved in the actual legal aspects and decision making of any case. Their funds can “only be used for personal life needs such as groceries, rent, car payments and student loans.”

Kelly acknowledges that there are other companies offering legal funding that are less than reputable. His organization supports legislation that prohibits “giving kickbacks to lawyers and medical professionals,” or having any involvement in the legal case itself. ALFA has supported proposed laws in several states that limit fees charged by funders. He says consumer litigation funds should be licensed with a state before they can operate there.

A Silent Partner

Insurance companies say that litigation funds may be responsible for a host of “nuclear” multi-million-dollar verdicts that far outweigh the actual damages sustained by the injured party. Among verdicts of more than $1 million, the average size of claims in the trucking industry, which has been particularly hard hit, have gone up by almost 1,000% between 2010 and 2018, Swiss Re says.

What frustrates insurers—apart from money they have to pay out—is they don’t know who they are up against. They are now fighting a legal battle to force litigation funders to come out from behind the curtain.

“The American Property Casualty Insurance Association is working … to require those involved in litigation to disclose the presence and financial interest of outside parties,” says Stef Zielezienski, the association’s chief legal officer.

There are several reasons for this. One is that a silent partner benefits the plaintiff and, by extension, the litigation funder, because jury members only see an injured person, perhaps on crutches or in a wheelchair, fighting a billion-dollar insurer. So, the plaintiff appears more sympathetic. They never see the multi-million-dollar fund that may be collecting a large portion of the settlement.

A trucking industry journal claims there are “secret litigation networks” of lawyers, doctors and funders creating a database of cases, working together and trolling for clients. Lawyers are educated in how to win “nuclear verdicts” of more than $10 million by advertising the big awards they’ve won, and using “the reptile theory,” psychodrama tactics that focus anger on the insurer and create sympathy for the plaintiff.

Hurting Bottom Lines

Major insurers like Chubb Chief Executive Evan Greenberg and others complain about how the “social inflation” of big jury verdicts is hurting their bottom line.

These legal tactics and the funders have put a big dent in the trucking industry. “Commercial auto insurance hasn’t had underwriting profit since 2010,” says spokesperson Mark Friedlander of the Insurance Information Institute, which tracks industry costs. “Experts are predicting average rate increases of up to 10% this year” and one reason is “nuclear jury awards.”

Plaintiffs’ attorneys tend to go after defendants with deep pockets and bigger insurance policies, like the trucking industry. Does this hurt consumers? Probably. Since it costs more to ship and deliver products by truck, which is how three-quarters of all products arrive on our doorstep, lawsuits and insurance premium hikes may add to the rising prices and supply chain shortages that are emptying store shelves.

But you probably don’t have to look at store shelves to see evidence of the impact of litigation funds. Look at your own insurance bills. When insurance companies pay higher claim amounts—and big court verdicts—they’ll pass on costs in their insurance rates.

Litigation Funds ‘Howl’

Insurance companies, and even some consumer advocates, agree that while litigation funders may help to balance the scales of justice, they’re in need of regulation.

One step that some states are already taking is to force them to come out of the shadows and acknowledge when they’re backing a case.

In 2021, the U.S. District Court of New Jersey ordered funders to reveal their identity and “whether the funder’s approval was necessary for … decisions” in the case. Reuters reported that “litigation funds howl” at the decision. But a federal court in California took a similar step and both Wisconsin and West Virginia have passed laws to do much the same.

Outrageous yearly interest rates that double the amount of the loan have also drawn criticism from academic studies that compare litigation funders to “payday lenders.” Even consumer advocate Birnbaum agrees. “The CESJ’s view is that just as any type of lending needs consumer protections, so does litigation funding.”

The Plaintiff’s Side

So if you’re injured, and your lawyer offers to find a litigation funder, what should you do? If you’re sitting in the plaintiff’s chair staring at the judge and opposing attorney, it’s hard to turn down an offer of help, particularly if you have medical bills you can’t pay or a job you can’t keep.

But no matter how good it looks to the lawyer, you still need to be your own advocate.

  • Demand to know the litigation fund’s reputation. If your lawyer referred you to the fund, ask your lawyer. If necessary, research it yourself.
  • Obtain in writing from your attorney whether the funder plays any role in the case apart from providing money. “Contracts should be written in plain easy-to-read language and consumers must be able to understand what they are signing,” says ALFA’s Kelly.
  • Find out what the funder will charge in interest.
  • You can try to negotiate for a lower fee if you feel the litigation funder’s fee is too high. These funds have faced court cases when plaintiffs believed they were excessive, according to Swiss Re.