Litigation Insurance: A Risky Gambit or Balancing the Courtroom Battlefield?
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Within the realm of insurance defense, attorneys are intimately familiar with the hidden machinations of litigation financing firms, covertly prodding plaintiffs to endure extensive treatments, all in the pursuit of maximizing claim values.
In many ways, the plaintiffs become pawns in a game orchestrated by others. Klein points to a study released by distinguished economics professors from Harvard Business School and Stanford University in April. Their findings surprisingly endorse litigation funders, attributing them with a net benefit.
These two economists meticulously modeled the quandary and ultimately concluded that, on the whole, litigation financiers substantially curb unethical practices on the defense side and observe minimal misconduct on the plaintiff's side.
Both Kass and Klein partook in a captivating virtual panel discussion hosted by the Coalition Against Insurance Fraud, delving deep into the realm of litigation financing, and analyzing its pros, cons, and complexities. The event also featured contributions from Matt Lehman, a Republican state representative from Indiana, and Eric Schuller, the esteemed president of the Alliance for Responsible Consumer Legal Funding in Washington D.C.
Schuller's organization represents litigation finance companies that offer small loans to consumers, enabling them to sustain themselves while pursuing legal battles. He advocates for state legislation to regulate consumer litigation financing to ensure that financiers conduct themselves professionally, fairly, and justly.
"Our industry facilitates survival for those with limited means, allowing them to pursue their rightful legal claims," Schuller explained passionately. He highlighted how consumer legal funding gained acceptance during the civil rights movement, as organizations like the NAACP supported plaintiffs by covering household expenses during lawsuits against discriminatory entities.
He added, "The litigation financier invests their own capital, becoming a valuable screening device to separate the meritorious from the frivolous claims."
An illustrative map displayed by the Coalition revealed that 14 states had already implemented legislation concerning litigation financing, with a focus on the consumer side. For instance, Indiana enacted a bill championed by Lehman, capping interest rates for consumer litigation loans at 36%. This year, the Indiana legislature went a step further, mandating disclosure of litigation funding contracts to opposing parties.
However, some states pushed their regulations too far. Schuller pointed out that consumer litigation lenders steer clear of Arkansas and West Virginia due to excessively low interest rate limits of 17% and 18%, respectively. Such constraints render the cost of capital prohibitive, leaving no room for a reasonable profit.
Schuller went on to emphasize that, aside from a few disclosure laws akin to Indiana's, the commercial side of litigation funding remains largely unregulated. He attributed this to lawmakers perceiving such financial arrangements as straightforward business-to-business contracts.
While Kass initially believed that litigation financing offered a promising means to level the playing field, he soon expressed reservations based on California's experience with Proposition 65. Although approved by voters in 1986, requiring businesses to disclose hazardous materials in their products and premises, it has now become a source of unscrupulous lawsuits in the state.
"Unregulated litigation financiers have propelled an explosive growth in the size of verdicts," Kass cautioned. He highlighted that robust laws in the United States oversee the corporate practice of medicine to ensure ethical control of medical care. Yet, within the realm of litigation financing, it's akin to the unruly frontier of the Wild West, where chaos and abuse reign.
"Anytime an unregulated entity operates in the shadows, it breeds abuse which is concerned about the subjugation of some personal injury attorneys under the control of litigation funders, who dictate the physicians plaintiffs visit.
"Conservative treatments like chiropractic manipulation aren't lucrative for investors; the real money lies in claims involving epidural injections.
While acknowledging the presence of unscrupulous actors in the litigation funding arena, Klein stressed that insurance companies also possess their "go-to doctors," providing opinions solely favoring defendants. Nonetheless, he reassured that nuclear verdicts, those of extraordinary magnitude, only materialize if supported by compelling evidence. The legal system includes safeguards to prevent inflated damage awards, and occasionally, such large awards are entirely justified as they indicate severe wrongdoing.
Here one crucial aspect: full disclosure of litigation funding agreements would serve the public's interests. However, Klein advocated for reciprocity, insisting that plaintiffs should gain access to defense attorneys' agreements with insurers. He also championed plaintiffs' right to learn if the insurance company's claims adjuster has any financial incentive to reduce payouts.
In the ever-evolving landscape of litigation financing, the debate rages on, fueled by varying perspectives and passionately expressed concerns. As this legal frontier continues to reshape itself, transparency and equitable practices stand as essential cornerstones, aiming to strike a balance between justice and financial interests.
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