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Lawsuit funding regulation in MI: Be careful what you wish for

May 10, 2016 by Steven M. Gursten

Personal injury lawyers hate lawsuit funding companies, but “regulation” could threaten victims’ ability to survive when No Fault PIP benefits are cut-off and insurers low-ball settlements

lawsuit funding regulations, image

I’m not a fan of lawsuit funding companies. I always counsel my clients to avoid them whenever possible. But I also think attempting to ban them through “regulation” could be worse.

“Lawsuit funding” is when a business – not a law firm – advances money to an auto accident victim (or other personal injury victim) to live on while his or her lawsuit is pending. The goal – at least, on paper – is to give victims the financial backing to withstand pressure from an auto insurance company to settle a lawsuit or claim for less than it’s worth.

Most attorneys inwardly groan at the very thought of lawsuit funding companies. Most personal injury attorneys have the experience of coming to work in the morning and finding a 4 a.m. fax waiting for them from some lawsuit funding company that their client called in the middle of the night. That 4 a.m. fax is usually followed by about three to six phone calls that morning between the hours of 9 and 10 a.m.

And there’s a pragmatic downside to avoid lawsuit funding.

Here’s what I told Michigan Lawyers Weekly when I was interviewed about lawsuit funding back in 2009:

“What happens is, when [auto accident victims have] borrowed so much, it takes away any motivation they may have had to accept a modest settlement … If [the auto accident victim’s] case goes south, they’re gambling with the house’s money. They have no stake in the case. There is no incentive to be reasonable. … It’s still mostly rare for people to abuse these [lawsuit funding advances] like that. But it is increasing … And I have a problem because I have to deal with unrealistic client expectations that force me to go to trial. And I used to only have to go to trial because of unrealistic insurance companies.”

But there’s a lot of good lawsuit funding companies can do as well.

Under the right circumstances, legal financing can be a literal lifesaver for Michigan auto accident victims, allowing them to survive when desperately needed wage loss or access to medical care has been cut-off by auto insurance. In these instances, lawsuit funding allows an accident victim to resist being pressured into low-ball settlements and to survive when their No Fault PIP benefits have been cut off.  I said the following to Michigan Lawyers Weekly in 2008:

“In today’s world, when someone can be hurt in a bad accident and can’t go back to work, but at the same time the no-fault insurance company isn’t paying the wage loss or medical bills that they are supposed to be paying … these companies can serve an important purpose … Funding companies can prevent insurance companies from getting away with settling cases for pennies on the dollar by taking advantage of plaintiffs’ crushing financial pressures.”

Yes, under the wrong circumstances, it can generate excesses that mislead personal injury accident victims, distort the settlement process and needlessly force cases into costly trials that ultimately, leave victims in financial ruin. Just as there are good actors and bad actors in every profession, there are some very good lawsuit funding companies out there (my friend Mark Bello comes to mind), and some very bad ones that charge usurious interest rates (these would include most of the lawsuit funding companies that advertise late-night on television, in my experience).

So, as with most things, there’s good and bad here. There’s a lot of grey. I ultimately come down on the side of allowing lawsuit funding, even though I don’t like many of the companies. This is because as long as Michigan law allows auto No Fault insurers to send people to notorious cut-off doctors (insurance medical examiners) and to get away with cutting off lost wages and other critical No Fault benefits without the insurer facing any risk of bad faith or punitive damages, these lawsuit funding companies are sometimes the only thing that allows accident victims to survive as they wait for a settlement.

Injury attorneys’ role in responsible lawsuit funding

I don’t think Michigan needs lawsuit funding regulation. And I’m opposed to Michigan enacting anything similar to Indiana’s “Civil Proceeding Advance Payment Transactions” law.

But I do think the Indiana law makes an important point about the role that injury attorneys should play in their client’s acquisition of lawsuit funding. Indeed, Indiana’s law reflects what responsible attorneys in Michigan have been doing for years.

Specifically, the law, House Enrolled Act No. 1127 (which takes effect on July 1, 2016) (Pages 16-17) provides that, when a lawsuit funding consumer “is represented by an attorney,” the contract with the “Civil Proceeding Advance Payment” (CPAP) provider “must contain a written acknowledgement by the attorney that attests to the following”:

  • “That to the best of the attorney’s knowledge, all costs and charges relating to the CPAP transaction have been disclosed to the consumer claimant.”
  • “That the attorney is being paid by the consumer claimant on a contingency basis under a written fee agreement.”
  • “That all proceeds of the civil proceeding will be disbursed through a trust account of the attorney, or through a settlement fund established to receive the proceeds of the civil proceeding on behalf of the consumer claimant.”
  • “That the attorney is following the instructions of the consumer claimant with respect to the CPAP transaction.”
  • “That the attorney has not received a referral fee or other consideration from the CPAP provider, and agrees not to receive a referral fee or other consideration from the CPAP provider at any time, in connection with the CPAP transaction.”

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