US Chamber and Big Insurance want free markets and limited government for themselves, but attack Legal Funding industry with price controls and onerous regulation
I have promised to explain more about my prior diary references to the Legal Funding industry, and why the industry is under attack by the US Chamber of Commerce, its "Institute for Legal Reform", its state level affiliated chambers and Big Insurance (think State Farm, Allstate, USAA, etc.) and their endless list of associations, such as PCIAA (the Property Casualty Insurer Association of America) and NAMIC (the National Association of Mutual Insurance Companies). Why does the US Chamber of Commerce want price controls and regulation to snuff out a small burgeoning industry while it campaigns for free markets and limited government for its Big Business and Big Insurance member companies?
This recent editorial from The Journal Gazette in Fort Wayne, IN, might be a good place to start:
http://www.journalgazette.net/...
The oped gives commentary on what the Legal Funding industry is about and why Big Insurance acts threatened by it, but I can provide more color. Historically, plaintiff attorneys have been ethically barred from advancing money to their clients except in 4 states (CA, TX, MN and LA). Doesn't mean that back in the day attorneys in the other 46 states did not do it, though, or that their clients were not in need of short term cash due to the injury that put them into litigation in the first place. However, Legal Funding companies started to come into existence in the mid-90s to fill the void. As mentioned in a previous diary, the need was also fueled by the increased aggressiveness of insurance companies to drive profits out of the previously sacrosanct claims side of the house beginning in the early 90s - which coincides with when privately held insurance companies, such as Allstate, began going public. Insurance companies began more aggressively favoring shareholders over policyholders, and the public began receiving lower offers and more litigation hurdles. Insurance companies to this day have a high incentive to wait plaintiffs out. The more plaintiffs wait, the more eager they may be to settle below established injury values (as determined by jury verdicts). And the more insurance companies delay payment, the longer they can accrue interest on their reserve funds. A perfect example of this was highlighted on CNN http://vimeo.com/...
Legal Funding companies stepped in to fill the void. They will give a consumer money now (let's say for example $1000, representing 5% of what the Legal Funding company thinks the consumer's claim is worth) in exchange for receiving a larger set amount of the future proceeds from the case, if there are any. If the consumer is unsuccessful in collecting on his or her claim, the Legal Funding company agrees it will receive nothing, and the consumer keeps what the Legal Funding company paid to him or her for the right to a potential positive outcome. In this instance, the Legal Funding company receives a negative 100% return. If the consumer is successful, the consumer's lawyer will collect the attorney contingency fee (usually 1/3rd of the proceeds), medical lien providers will be paid, and the Legal Funding company will receive its initial investment back plus some scheduled additional amount of proceeds that it contracts for in the purchase agreement with the consumer.
Two other key elements to a Legal Funding transaction are worth mentioning. Because the consumer is represented by an attorney, the consumer's attorney always reviews and signs off on the transaction - something very rare safeguard in a consumer financial transaction. And the Legal Funding company inherits no rights to have any say on the prosecution of the claim. And why would a plaintiff's attorney want to listen to them, anyway?
So is this a loan? The Legal Funding companies will say no since it is missing a key legal element of a loan - an absolute repayment obligation. The consumer's credit is not impacted, the consumer makes no current payments, and the consumer gets to walk away with no obligations if the case is unsuccessful in producing proceeds. The US Chamber, the ILR and the Big Insurance associations will say that it is because some states have low interest rate caps that Legal Funding would get shoehorned into if the practice gets categorized as a loan. These usury caps typically range from 8% to 25%, well below the cost of capital and customer acquisition costs of Legal Funding companies, and the opponents know that this classification will make Legal Funding companies disappear. It is a death sentence.
And why does the US Chamber, etal, not like Legal Funding? They have expressed a concern that consumers who are relieved of an immediate financial need will have longer staying power, and will ultimately be able to prolong the settlement process long enough to hold out for a higher (and some would say more fair) settlement. An unspoken insurance industry motto has been that you can have a "prompt or fair" settlement, but not both. If you want fair, you have to outlast the insurance company. And time is the insurance company’s friend.
So the US Chamber of Commerce, the big proponent of limited government and free markets (and the Tort Reform poster boy), is out campaigning at the state and federal level for more regulation and price controls through bills that would deliver the death sentence to this product and for the entrepreneurial small businesses attempting to provide it.
So right now the debate comes down to whether this is a product that consumers should have the opportunity to take advantage of – with the proper transparency and safeguards, or should it be given the death sentence by the businesses that feel threatened by this disruptive concept.
I am running out of time and space for this diary entry, so will save additional details and more of my views for my next diary. If you have made it this far through this diary, thank you for listening!
And if you remain interested in this topic, here are some useful reference sites:
Legal Funding advocate sites
http://www.americanlegalfin.com/
http://www.arclegalfunding.org/ (also on Twitter @arclegalfunding)
Some opponent links:
http://en.wikipedia.org/...
http://en.wikipedia.org/...
http://www.freeenterprise.com/... (A US Chamber operated site)
For a list of member companies backing the US Chamber of Commerce and its Institute for Legal Reform (from before they started to hide this information):
http://www.fixtheuschamber.org/...