Big insurance companies have big lobbying budgets. Small business owners do not. What happens when small entrepreneurs identify a market need, fill it, and find that this does not make big entrenched interests happy? They are forced to fight for their survival. Insurance companies have every reason not to like Legal Funding (aka Lawsuit Lending or Litigation Finance), or the Legal Funding trade association Alliance for Responsible Consumer Legal Funding (ARC) tasked with contending with the vast resources the insurance companies have directed at eliminating this product as a choice for the American public.
Insurance companies have massive market power. Every American that drives is compelled by government mandate to carry insurance so the market for their service is guaranteed. The largest company, State Farm, commands a 19% market share of every driver on the road legally.[1] The insurance industry has multiple lobbyists in every state, belongs to multiple trade associations that further its political agenda, and pumps tens of millions into the campaign purses of sympathetic legislators every year.[2] They have the influence to make sure that regulatory changes stay benign to them.
Their greatest foot soldier in this battle is the Institute for Legal Reform--the tort reform inner ring of the U.S. Chamber of Commerce that can afford an executive director making over $2 million a year. And they are not happy that they are not getting what they want and have been actively campaigning for over the last 3 years - a ban on Legal Funding. Must be some merit to the product if so many legislatures have resisted their well-financed effort.
Like insurance, Legal Funding is, of course, a for profit venture. But it is serving a need created by insurance companies. Pay claims faster and the need for Legal Funding goes away.
Insurance companies decades ago figured out the financial vulnerability of the insured and the immense leverage insurance companies have over them. They know how long it takes people to find legal representation when they have been harmed (usually 2 weeks from the date of the accident). They know how much more of their loss of income people can recover when they are represented by counsel (about 2x). They know that they can get people to jump on a quick cheap offer if the people are under financial pressure.
They know that time is on their side, not on the individuals. Time is money to them. The longer they wait, the more their cash reserves grow and the more financial pressure individuals suffer. In fact in 2015, P&C insurers saw their investments grow by $55 billion by sitting on those cash reserves intended for the payment of claims.[3] Great incentive to wait the less fortunate little guy suffering cash flow issues from loss of work and medical bills.
These dynamics created the market need for another alternative. A functioning market provided one. Legal Funding providers came into business and gained popularity by providing people with a choice. They can receive part of their settlement up front - at the time they actually need access to it - for a cost when the insurance company finally steps up to pay the liability it knew it had from the get go.
Insurance companies are used to writing the rules. They do not like regulation when it is targeted at them. But they are all-in for creating rules and regulations to eliminate an industry that threatens their profit margins. In 2014, insurance company financial reports showed that for every premium dollar charged, insurance companies only had to pay 57 cents. Receive a dollar today, only pay out 57 cents at some future date years out in the future.[4] Not a bad business model. That certainly leaves a good chunk of change for stomping out the competition.
In comparison to the bankroll of the insurance industry, the legal funding trade association (ARC) has a miniscule budget. The companies that are members are small businesses that have to fight against a Goliath. Fortunately, lawmakers have seen through the veiled interest of Big Insurance to ban Legal Funding and eliminate options for people who have been in accidents. Big Insurance might have more clout and more money, but it does not have the better argument to justify eliminating a consumer’s choice.
[1] “Annual Report on the Insurance Industry,” Federal Insurance Office, U.S. Department of the Treasury (Sept 2015), pg. 17: www.treasury.gov/...