Lawsuit Funding: Why liability insurers don’t like looking in the mirror

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On November 4, 2016 Joshua Schwadron spoke at the Fin(Legal)Tech Conference, the following are his prepared remarks:

I want to tell you about something that is repugnant. Or at least it was considered repugnant when it was first introduced in the late 1800’s. Its called liability insurance, what we consider car insurance today. The idea that someone could do something bad and know that they could just walk away from it without any liability, offended many people’s sensibilities at the time. Not only that but many said it would encourage litigation, influence settlement negotiations and introduce a third party into lawsuits.

Liability insurance companies are incumbents in a trillion-dollar industry. And like most entrenched incumbents they want to protect their empire. The newest innovation in their crosshairs? Financing for personal injury plaintiffs.

Today liability insurance is ubiquitous. Of course people should be protected from financial ruin due to a single mistake. And insurance companies are no longer underdogs trying to prove themselves. They are the incumbents in a trillion-dollar industry. And like most entrenched incumbents they want to protect their empire. They want to shut down any new innovations that have the possibility of affecting their bottom line.

I want to tell you about the newest innovation that is in their cross hairs. It’s a new product — a form of insurance, if you will — something I believe passionately in. It’s providing financing to personal injury plaintiffs while they wait the years it ordinarily takes for the legal system to bring them justice. Insurers see it as a major threat and are spending millions of dollars to try and shut it down.

To explain just why they are so unnerved, let me tell you a story. A few years ago, I received a call. It was a friend of mine, an attorney in Florida. He told me about a new client of his, a woman who was engaged to an All-star athlete who had been beating her up for years. She was trying to get out of the relationship, but she, like countless women in abusive relationships, felt trapped because he was her only form of economic support.

One day, she set up a video camera and the next time he physically abused her it was recorded. She took it to a lawyer and confronted her fiance. He was unfazed — this is before the Ray Rice incident — and made a lowball offer. He knew that she had limited options for income and was betting that she would soon cave.

The dynamics of this situation — a rich defendant versus a poor plaintiff — are unfortunately not anomalous. The same dynamics are present in virtually all personal injury cases. Personal injury plaintiffs are one-time players fighting not against their offenders, but large insurance companies, which are repeat players who have a lot of experience, political connections and savvy.

The systematic exploitation of plaintiffs in our civil justice system is an abomination, highly underreported and all too regular.

Most of us here have heard of the term frivolous lawsuits. But many of us probably haven’t heard of “frivolous defense,” even though many scholars believe its the latter that causes the courts to clog and not the former. Frivolous defense is one of insurance companies’ favorite tactics; they delay, deny and defend legitimate claims and payments, and abuse procedures and process. They want legal cases to be a war of attrition on plaintiffs, draining their wallets until they are desperate enough to accept a lowball offer. The systematic exploitation of plaintiffs in our civil justice system is an abomination, highly underreported and all too regular.

But plaintiffs now have other options. Which brings me back to why my attorney-friend decided to call me. At the time, I was running a firm that offered financing to plaintiffs. I told him that if what he was saying about his client was verified, my firm would give her enough money to pay her living expenses for a couple of years, in exchange for a percentage of her expected settlement. It was an investment, not a loan, because my firm would get nothing if she didn’t recover.

My friend hung up the phone and told the woman what I said. Relieved, she went back to the negotiating table, and when her fiance reiterated his low-ball offer, she had the guts to say no. Something she would have never been able to do before she knew that she had no safety net. Her fiance , believing her now, came back a few days later with a fair offer and the case was resolved.

Bear in mind: There was no actual transfer of funds. My firm did not make a penny. Just knowing that this product existed gave her the confidence and patience to fight for what she deserved.

Financing plaintiffs is the mirror-image of liability insurance

What legal funding offered her is exactly what liability insurance provides for defendants. Professor Charles Silver at University of Texas Law School, argues that financing plaintiffs is the “mirror-image” of liability insurance. Both products involve transferring risks and costs to a third party. Both products insure people from falling into a financial spiral due to an injury. Making financing accessible for plaintiffs is essentially “victims’ insurance.”

Plaintiff financing threatens insurance companies monopsony power, and insurers are responding by using their enormous power to lobby and legislate it out of existence.

Insurance companies are freaked out, because this new form of insurance threatens their monopsony power. You see, as the defendants, they are used to being the only ones authorized to “purchase” a plaintiff’s legal claim. That’s no longer true with plaintiff financing, as it introduces competition. Plaintiffs now have options. Instead of selling 100% of their claim to an insurance company, they can sell a fractional ownership interest in their claim to a funder in order to get the immediate liquidity they need to pay their medical bills, live their lives and wait for the justice that they deserve while they wait for a fair offer from insurance companies to sell the rest.

Insurance companies are responding to this innovative form of insurance in a predictable way. They are doing to it what the taxi industry is doing to Uber and what the hotel industry is doing to Airbnb: they are using their enormous power to lobbying and legislate it out of existence.

And you’re going to love what they’re arguing: that legal funding encourages litigation, influences settlements, and introduces a third party into a lawsuit — the same arguments that were used against them a hundred years ago. Irony is certainly not dead. You want to talk about audacity. They are conveniently forgetting their own repugnant history. They are trying to kick the ladder a century after they’ve climbed it.

But we can’t let them. We need to fight for this new financial innovation. Because what’s at stake is much more than the convenience of getting a faster cab or a cheaper hotel room. What’s at stake are people’s lives. The integrity of our justice system. The social contract we have with plaintiffs that says if you get hurt and it’s not your fault, we will help you get made whole. We must not and cannot wait for 120 more years for plaintiffs to have the same safety net that defendants have today.