Your Guide to Underwriting MVAs

Motor vehicle accidents (MVAs) are the bread and butter investment for many plaintiff funding companies. Not only are they reducible to strict and easily understandable underwriting criteria, they are also one of the most common case types.

To help you and your team better understand and assess MVAs, I'm going to break down some of the key case information to look out for and use during your analysis. This post intends to help all members of your legal funding organization, including helping:

1. Business owners update and assess document requests and underwriting criteria.
2. Underwriters get a refresher on what to look out for during assessment of MVAs, and provide another framework against which you can compare your criteria. 
3. Case managers learn what information to look out for when gathering documents, and increase your legal fluency when discussing cases with attorneys. 

Without further adieu, here are 5 important pieces of MVAs applications you should always keep in mind when underwriting for legal funding. 

1. Number of potential claimants
2. Medical billing
3. Policy limits and damages 
4. Causation considerations
5. Time since date of loss

#1 Number of Potential Claimants

As a refresher, most personal insurance policies have a per claim limit, as well as an aggregate limit of liability. For example, a 25/50 policy specifies that the limit for any one claim is $25,000 and the aggregate of all claims is $50,000.

One all-too-frequent error results when the underwriter fails to ask themselves two of the most basic questions when reading the police report for an MVA:

1. How many passengers and drivers were involved?
2. How many people could be making claims for injuries? 

Despite the simplicity of these questions, oftentimes the answers aren't completely obvious for a number of reasons. First, police report formats vary by jurisdiction and the handwriting is often indecipherable. Second, the number of claims can change over time, if a passenger develops soft-tissue injuries or someone drops their claim, as examples. Third, claimants represented by different law firms.

It is essential, however, for you to have as clear a picture as possible regarding exactly how many people may be making a claim against the same policy. Even identifying the potential existence of such ambiguities is a step in the right direction.

Note that completely relying on the police report for liability is a mistake.

Just because the defendant received a ticket does not mean the plaintiff is without fault, and the value of a case may be dramatically different based on a more nuanced liability determination.  

#2 How Medicals are Billed to Plaintiff 

Plaintiffs can be billed for their medical expenses in a number of different ways, each of which affects the precedence of your funding lien and the potential value of the investment.

Here are the four most common ways to bill a plaintiff: 

1. Simple billing, for example, a hospital bill directly to the plaintiff. 
2. Assignment of waiver signed by the plaintiff validating that a bill is open and held until paid by the settlement of the case. This is an agreement between the provider and the doctor.  
3. Liens, with actual judgments and lien documentation sent to the attorney and filed on the case.
4. Letters of Protection issued to providers by attorneys.

For you, neither simple billing nor an assignment of waiver causes a lot of problems. Simple billing will be subordinate to your funding, presuming your contract is soundly structured. The assignment of waiver will also be subordinate to your funding in most instances.

It's methods three and four that have pitfalls:

Liens: You must remember to look into the question, which seems straightforward enough, of, "does the medical lien take precedence over my funding lien?" 

Answering this question in full would take an entire post. Suffice it to say that failure to investigate any medical lien during a case review and misunderstanding whether and how it may take precedence to your funding lien is a common and dangerous error. Only after proper research and knowledge can you more accurately calculate how much money to expect for investment recoup.

Letters of Protection (LOP):  Although LOPs are contractual obligations between the provider, the attorney and the client, I can almost guarantee that they will take precedence to your lien no matter LOP creation date.

LOPs are generally agreements between attorneys and medical providers who consistently work together. It is highly unlikely an attorney is going to stiff a close colleague so you can get the full amount of your investment.

You should act conservatively and assume that the LOP will take precedence over your lien.

#3 Policy Limits and Damage Mismatch

This is an important consideration, the neglect of which is closely associated with overlooking the number of potential claimants. A policy limit / damages mismatch can be catastrophic for a case.

You can have substantial injury and treatment for the plaintiff who applied for funding with you, and still have five people on a $25,000/$50,000 policy. The real concern in this instance is the fact that the attorney may be the only one profiting from the case. 

In a vacuum, that plaintiff may have a $500,000 case, but can only bite at one-fifth of $50,000. He/she will likely have medical bills and other liens, as well.

Similarly, a serious injury that has $500,000 in medical bills, but a $500,000 policy, is not a good case for funding.

To address the mismatch between policy and damages, you must first find out whether other people can and are making a claim, and then take your analysis a step further to get a full picture of additional coverage. Typically, plaintiffs have underinsured coverage or the defendant(s) has umbrella policies.

These considerations must be taken and they can go many layers deep.  Not understanding what policies are available orhow many people are making claims against them, is one of the most common and dangerous mistakes made by funders and underwriters alike when breezing through "basic" MVAs.

#4 Causation Considerations

Insubstantial causation is another one of the biggest reasons funding companies lose money on cases. Too often I see underwriters looking exclusively at the end medical result (e.g. a surgery) and concluding it must be a good case, as substantial treatment is involved.

The biggest misstep at this stage is deciding that a case is a good investment simply because an attorney took the case. Compared to a funding company, an attorney representing a client is initially not as concerned, in the early stages of a case, about the level of the damage caused in the accident, or whether it was traumatically induced or classified as an exacerbation— they win either way.

It is also critical to review initial treatment records. If initial treatment is given after the first 48 hours of an injury, the pressure to demonstrate that the injury was caused by the accident (and not something else) heightens. By reviewing these records, a funder can determine what injuries were contemporaneous with the accident.

Many times, the surgery or major injury involved in a claim is never mentioned during initial treatment, which makes relating the injury to the accident very difficult.

In short, don't take medicals at face value and make sure you understand them. You need to be sure that the accident actually caused the damages and that the injury rises to a level adequate for your outstanding lien.  

#5 Time since date of loss 

As legal funding becomes more prevalent, more plaintiffs seem to seek funding as soon as they get into an accident, making it increasingly common to see cases within six months of the DOL and long before a suit is even filed. This is becoming a big problem as more funding companies enter the market and are pressured to deploy capital quickly, thereby providing too much money to plaintiffs too early in a case.

Suffice it to say, the age of the case needs to be considered when underwriting. How much you fund and at what stage you fund will matter even for these basic "life span" cases.  As stated before, MVA cases are the most common type, and generally fit into an average of length to completion (depending on venue). Statistics indicate that two to three years are your maxes, 9-14 months are your minimums. 

So, while you want to put money on a case at a stage wherein value will grow, you also don't want to invest too much too soon— when the the facts are still unclear.

Recall the earlier tip regarding police reports. If you invest in a case based solely on a police report (and without properly assessing liability, funding too much, too early could be financially disastrous. This is an important consideration for repayment, too.  When trying to collect a large repayment, it is critical to remember optics — a $10,000 funding may look good initially, but, in five years, the $50,000 repayment may look daunting and bring someone to object to repayment.