Can "legal funding" get you a bigger insurance payout?

You’ve probably never heard of Oasis Financial, and with luck you never will.

Oasis Financial is a major player in the burgeoning “legal funding” market. If you need Oasis, or a similar firm, it means you’ve been injured and are now in a painful and protracted battle to get an insurance settlement for either an auto accident or workers’ compensation claim.

How does it work? Here’s how consumer advocates, lawyers, insurers and those who have been through this meat grinder describe it: After your injury in a car crash or on the job, a friendly insurance adjuster will call to offer a settlement. But if that offer doesn’t cover everything you think you deserve -- for pain and suffering, uncovered doctor bills, future medical needs or total damage to your car -- you may call one of those lawyers who advertise “Injured in an accident?” on TV or a highway billboard.

Bear in mind that when your lawyer walks in the door, your “friendly adjuster” walks out, and then the tough talk begins. It will get even nastier during the inevitable two to three years before your case is heard before a judge. You’ll see delays, demands for discovery and be caught in a David and Goliath battle pitting you and your lawyer against a billion-dollar insurance giant with numerous experts on speed dial.

If you’re still nursing injuries, out of work and with a checkbook showing a zero balance, the temptation to settle is inevitable.

That’s when Oasis, or another member of the Alliance for Responsible Consumer Legal Funding (ARC), could enter the picture. Simply put: Oasis and other ARC members provide money for injury plaintiffs fighting legal battles against insurers.

Plaintiffs agree to sell a portion, up to a 15 percent maximum, of their potential settlement from the insurer to Oasis. In return they get, on average, about $1,500, although the Oasis website says it offers up to half-million dollars.

The cash from that “sale” goes directly to the plaintiff to pay for food, housing and medical expenses during the almost three years before the case goes to court. “Three quarters of all American families are living paycheck to paycheck,” said Oasis chief executive Ralph Shayne. “If they’re in an accident or unable to work, they’re in financial limbo during this time.”

Oasis has a complicated formula for how it gets its money back, which could run afoul of state usury laws like the one in Tennessee governing how much you can charge in interest. Shayne prefers not to call it an interest-bearing loan, using the term “discounted sale” instead.

If the plaintiff dies, leaves the country, drops the suit without settlement or simply loses in court, Oasis could lose all the money it already gave to the client. So Oasis “fronts” the plaintiff between 60 percent and 80 percent of what it expects to get back, allowing it to pocket as much as 40 cents on the dollar when the case is settled.

In a typical example Oasis provided, it would discuss the case with the plaintiff’s lawyer and assess a likely settlement of $21,000. Oasis would then immediately provide $2,100 and receive $3,000 when the case gets settled.

Let’s be clear: Oasis, and companies like it are no more charitable than insurers. Injured plaintiffs can feel like a football in a rough game of tackle being kicked back and forth while both sides try to rack up all the yardage they can. If they lose in court, they get nothing. If they settle, their lawyer gets one-third, plus expenses. And Oasis is right in line behind the lawyer to take its cut -- before the plaintiff gets anything.

The insurers and the legal funding firms each have a lot of firepower, both intellectual and financial. Private equity firms, like hedge fund D.E. Shaw, which was founded by computer scientist David E. Shaw, bankroll Oasis. So it knows the “recovery curve” of likely outcomes for injury cases just as well as the insurer and how much it can afford to risk. Oasis started operations in 2003 and has underwritten more than 100,000 lawsuits, according to Shayne.

“When insurance companies went from mutual to public companies, we saw they were putting the stockholder ahead of the policyholder,” said Shayne. “That’s when we stepped in.”

Consumer advocates agree that the insurance industry has made a noticeable change. Mark Romano, a former adjuster for two major insurers and now director of claims projects for the Consumer Federation of America, said he has seen insurers rejigger their computer programs to deliberately lower the amount that should be paid to claimants.

Insurance companies have also brought in high-price consultants to turn their claims departments into profit centers by taking a hard line on how much to pay out, delaying settlements and training adjusters in how to use psychology to obtain cheaper payouts, Romano said.

Insurers also keep a scorecard of which personal injury lawyers actually take cases to court as opposed to those who fold and settle before the case goes to trial, according to lawyers who oppose them.

Despite consumer funding industry’s 13-year record, Shayne said it’s still relatively small, handling only half a percent of the thousands of claims cases that go to court each year.

“We’re just the mosquito on the back of the elephant,” he concluded.

Small or not, legal funders are having a big effect on the property-casualty industry. “All our members know about them,” said David Goldman, assistant vice president for commercial lines at the Property Casualty Insurers Association of America. And they don’t like them.

“These people are the litigation equivalent of payday loans with high interest rates,” said Golden. “You have the obligation of future payment even if you only win $5 in a court settlement.” Having to add in the additional cost of “legal funding” forces plaintiff’s lawyers to demand a bigger settlement. When insurers have to pay more to settle, they end up charging everyone more in premiums, he said.

And while insurers are highly regulated, he added, these privately held funding companies like Oasis are a “black hole,” which is why some states have pushed them out of their territories with laws limiting their interest rates.

Golden disputed the fact that insurers stonewall on injury settlements. “Most insurers want to settle as soon as they can and get the claims off their books,” he said.

But in 2010, Allstate, one of the country’s four largest property-casualty insurers, agreed to a $10 million settlement with state regulators. An 18-month investigation uncovered problems with the way Allstate used its software to evaluate bodily injury claims. Allstate agreed to change the program but did not admit wrongdoing.

So what should you do if you’ve been injured in an accident? Lawyer Howard Kanner, a founder of personal injury law firm Kanner & Pintaluga, which operates throughout the Southeast, said he doesn’t see either side as inherently evil.

“Insurers try to run a profitable business, and that means paying out as little as possible and, if there’s a lawyer involved, delaying as long as possible and hope the plaintiff gets fed up,” he said. “Twenty years ago -- before Oasis -- I might have had to settle for pennies on the dollar when I had clients who couldn’t weather the storm.”

But Kanner admitted that fighting an insurer for the last dollar might not always be worth it. “If you escaped an accident with just a few bruises,” he said, “then it probably makes sense to settle.”