Mapping Financial Stakeholders in the PI Industry

November 15, 2018
8min read

Why the Contingency PI Industry Exists

People commonly think of personal injury cases as a battle between individual defendants versus plaintiffs. But in reality, when a plaintiff is injured, s/he is not going up against a defendant, but an insurance company, which is a well-resourced entity. So in order to get justice, individual plaintiffs need people who have their back. They need services to fight these insurance companies: legal, medical, financial services, and others. These services are provided to defendants by their insurers, but there’s no such thing as plaintiff insurance, so they have to figure out how else to pay for them.

Paying for these services is easier said than done; plaintiffs are typically one of the 63% of Americans who can’t come up with more than $500 in the case of an emergency. A personal injury is their emergency. Unlike defendants, who have services paid by Allstate, State Farm and other large insurance companies, plaintiffs have to figure out a way to pay on their own. It’s not that plaintiffs don’t have the money. They just don’t have the money now, and they will soon when their case settles, which might be years from now.

Enter: Contingency. Think of it as an “IOU” or “credit.” A contingency arrangement allows plaintiffs to leverage an asset they have today (i.e. their case) and promise to pay out of proceeds from that asset to get the services or funds that they need today. Plaintiffs are able to assign parts of their cases in exchange for the services they need.

There are lots of service providers who are willing to accept a case as a form of collateral: attorneys, medical providers, funders, etc. How do these players interact with one another?

Introducing the financial stakeholders: Plaintiffs, attorneys, medical providers, and funders

Let’s take Plaintiff Pam. She was badly injured in a motor vehicle accident, and she is out of work, with a stack of bills to pay. Through some Google searching, she finds a personal injury attorney, Attorney Alex, who takes on Pam’s case on contingency, meaning that Alex will be paid a percentage of the future settlement for legal services. Pam’s case will likely take a few years to settle, and Alex won’t see a dime until then.

In the meantime, Pam needs serious medical treatment. The problem is she doesn’t have health insurance and the defendant insurer will only pay her medical bills if she agrees to settle her entire case for far less than Attorney Alex advises her it's worth.

In a twist of tragic irony, although Plaintiff Pam’s case is worth a lot, she can’t pay for the medical treatment that she needs to access value of the case. This is not uncommon. We’ve previously written about a plaintiff who couldn’t afford transportation to medical treatments and thus missed many doctor appointments. The insurer used this to argue that since the plaintiff kept missing appointments, he wasn’t in serious need of treatment and thus his case was worth less than what the plaintiff’s attorney was arguing for.

In the case of Plaintiff Pam, Attorney Alex refers her to Dr. Debbie, a medical provider who is willing to be paid on contingency as well. Attorney Alex writes her a “letter of protection” (LOP), assuring her that she will be reimbursed for her services out of the settlement when the case concludes. With that letter in hand, Dr. Debbie performs a variety of services and orders a few tests, all out of her own pocket, and sends the bills to Attorney Alex.

Pam also has to come up with rent and childcare, which is going to be difficult as her job pays her on an hourly basis and she is now too injured to come into work. So Attorney Alex refers her to Funder Frank, a plaintiff funder who advances Pam short-term funds, and who will be repaid, with a return, upon the settlement. While the return is usually high compared to other loans, if it helps plaintiff’s wait for a higher settlement offer, it usually pays more than it costs. Like Dr. Debbie, Funder Frank gets assurances from Pam and her attorney that he’ll be paid back his money plus the return directly from the settlement proceeds by Attorney Alex from the client’s funds account (formally a “trust” account).  

Both Dr. Debbie and Funder Frank are stakeholders in Pam’s case because they hold “liens”; in other words, they hold “financial interests” in her settlement. Three years later, the case settles. The insurance company agrees to pay the plaintiff a lump sum of money. Attorney Alex effectively turns into an “escrow agent” who is responsible for dividing up that lump sum of money between the lienholders (in this case, Dr. Debbie, Funder Frank and himself), and the plaintiff. Attorney Alex is authorized by Plaintiff Pam to bind himself with a contractual duty to first pay lienholders, himself, and then finally the plaintiff.

This short scenario does not cover all possible lienholders or potential escrow agents, but it provides an overview of the major players.

What major problems do these different lienholders and escrow agents face?

One major problem is lien-management. Escrow agents (lien-payers) spends an inordinate amount of time trying to keep track of all their liens and keep those lienholders updated on the status of cases. A typical plaintiff may visit a primary care physician, two specialists, a physical therapist, and a chiropractor over the course of a few years. Keeping track of all the bills tied to a plaintiff as they accumulate over time can be a real administrative hassle, especially since plaintiffs may seek out medical providers on their own accord without letting their attorneys know.

From the perspective of lienholders, tracking down the attorney of the patient to confirm their liens can be a huge headache, especially if the patient chooses to switch attorneys midway through their cases. Not only is lien confirmation an issue, but often lienholders want to follow up every few months – over the period of a few years – with attorneys to get case updates and remind them that their lien exists.

Bottomline, there is a lack of transparency as to who is owed what. Attorneys spend weeks, and sometimes months, trying to track down all the lienholders and calculate their final lien balance before they can accept offers from insurance companies. Doctors spend too much time calling attorney offices to receive case updates on when they will get paid. Legal funders have to hire staff to track liens after contracts are signed to ensure attorneys don’t forget to pay. People are spending unnecessary time on administrative tasks outside of their professional skill-set that can easily be automated. The personal injury industry needs an injection of transparency and technology that will eliminate unnecessary administrative tasks and facilitate faster and more efficient ways of working.

Photo credit: Paul Henri via Pixabay

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