by Stephen Pauwels
November 20, 2019
BridgePoint Co-Founder Stephen Pauwels was invited to join a panel speaking session at the 2019 Ontario Brain Injury Association conference in Niagara Falls on November 6 - 8. The subject of the panel discussion was "How Financial Constraints Can Impact Recovery after a Brain Injury". The following research paper was the subject of his presentation:
Accident victims navigating the personal injury litigation process (“Claimants”) are vulnerable – physically, psychologically and financially. The personal injury litigation process is a lengthy one, requiring on average three to five years and in some cases closer to ten years from the date of injury until resolution. Claimants who do not have the resources to meet their financial needs in the interim find their alternatives limited for the following reasons:
- Traditional lenders such as banks will not consider pending litigation as collateral security for a loan. These institutions do not have the expertise to evaluate the merits of legal claims and would never accept the risks and timing uncertainties inherent in litigation.
- Interim financial support measures such as income replacement benefits, where available, are limited to a percentage of an individual’s pre-accident income up to a “cap” of between $140-$400 per week. Such benefits are only available for a limited period of time which is invariably shorter than the duration of the litigation (and are routinely terminated much earlier).
- Medical and rehabilitation treatment benefits have been reduced under insurance legislation and regulatory changes in several provinces, including Ontario. In addition to essential rehab programs and attendant care costs, these reductions have affected benefits covering home modifications to accommodate disability needs, life skills training, vocational re-training, workplace modifications, counselling and transportation services. The burden of funding such services has increasingly been shifted to the Claimants themselves pending the outcome of their litigation.
- Those in the best position to evaluate the merits of a Claimant’s case – their own lawyers – are precluded by their rules of professional conduct from financially assisting their clients.
- Court backlogs across the country have extended the average duration of personal injury litigation beyond the financial breaking point of many individual Claimants. Meanwhile, legislative changes in Ontario have reduced the rate of pre-judgement interest payable by defendant insurers on damages owed to successful plaintiffs – creating a disincentive for insurers to settle claims on a timely basis.
As a result of these and other factors, the litigation playing field between individual accident victims and the large insurance companies who fight their injury claims is far from level, with Claimants often capitulating to opportunistically low settlement offers out of financial desperation.
The Courts themselves have recognized this issue. Access to justice is considered one of the most pressing social policy issues currently facing the Canadian legal system. Former Chief Justice of the Supreme Court of Canada, Beverly McLachlin, cited the lack of funding as a major impediment to achieving fair access to justice for ordinary Canadians:
“The most advanced justice system in the world is a failure if it does not provide justice to the people it is meant to serve. Access to justice is therefore critical. Unfortunately, many Canadian men and women find themselves unable, mainly for financial reasons, to access the Canadian justice system.”
The litigation finance market in Canada has evolved significantly over the past fifteen years to meet the specialized funding needs of Claimants, as well as those of the lawyers, experts and other litigation support service providers who serve them. “Settlement loans” are now offered by dozens of “litigation lenders” across the country. These loans are intended to help cover the Claimants’ basic cost of living expenses, typically once other more traditional funding sources have been exhausted. Ideally, the settlement loans are structured in staged monthly advances that minimize the interest costs while providing Claimants with the peace of mind of a regular source of funds to emulate or supplement income replacement benefits.
As with any form of borrowing, settlement loans should be approached with a high degree of caution and used only in moderation. Given the high risks assumed by the lenders, the interest rates are invariably higher than traditional bank loans – and typically range between 18% to 24% annually.
Other Settlement Loan Features and Distinctions:
- Settlement loans have no set term or fixed repayment date. The loan is repaid upon the resolution of the underlying legal claim, whenever that should occur and a demand for repayment cannot be made by the lender earlier.
- The Claimant is the borrower, and the settlement loan is not guaranteed by the Claimant’s lawyer.
- Settlement loans are typically only paid AFTER legal fees and disbursements pertaining to the claim have been fully satisfied.
- Borrowers are welcome, but not obligated, to make interim payments or repay the loan or portions thereof at any time prior to the resolution of their lawsuit.
- The settlement loan amount is determined by the lender generally on the merits and anticipated recovery of the borrower’s pending legal claim. Borrowers are not required to demonstrate a source of income or offer tangible security such as a home or vehicle as security against the loan.
- The borrower must have retained counsel under a contingency fee-based arrangement to qualify.
While there have been conflicting court decisions regarding the recoverability of interest costs on settlement loans from defendants in various provinces, the majority of cases have determined that the interest costs are non-recoverable, and are therefore to be paid by the Claimant out of their net settlement proceeds or award. As discussed later in this paper, there is a strong argument to be made that interest costs on settlement loans – particularly those used to fund reasonable and necessary treatment services – should be recoverable from defendants in certain cases.
Reputable litigation lenders take care to ensure that any settlement loan amount offered is appropriate for the Claimant’s actual funding needs, while also being in proportion to the prospective value and stage of their legal claim. BridgePoint Financial Services, for example, does not lend more than 10% - 15% of its independently assessed value of a claim or less depending on the stage of the litigation.
In summary, the risks and repayment characteristics for settlement loans are very different from those of traditional lenders, and must be appreciated when considering the reasonableness of their cost.
Lawyers and Claimants should ensure that any lender they consider has been qualified by the Ontario Trial Lawyers Association’s Policy on Litigation Loan Companies, which offers a code of conduct for litigation lenders.
A specialized extension of the litigation finance market has been developed to specifically finance the costs of medical and rehabilitation treatment products and services (“treatment”) where insurance benefits are denied, exhausted or are otherwise unavailable.
Non motor vehicle related accident victims have always been forced to rely on third party medical coverage through employer benefit programs, public health care services or non-profit assistance programs where available to access medical and rehabilitation services that are integral to their recovery. In many instances, these ‘alternative’ service providers are incapable of meeting the non-acute long-term needs of the seriously injured.
Motor vehicle accident victims meanwhile have traditionally been able to access reasonable and necessary treatment services via benefits offered under their mandatory insurance regimes. Such medical and rehabilitation overages in many provinces including Ontario are being reduced significantly as a result of legislative and regulatory changes. Changes to first party insurer policy limits in many instances have also shifted much of the recovery of costs for treatment when incurred to tort from first party legal claims.
The common result of these many factors has been the development of a large and growing “funding gap” to pay for the treatment that is integral to many injured parties’ rehabilitation prospects. The following excerpt of a loan application received by BridgePoint from an Ontario resident provides a valid example of the dire situation many accident victims now face:
“My settlement has been held up to the point where I'm about to lose the roof over my head, my car, my cell phone. My leg braces are cutting my feet and are being held together by duct tape because I'm waiting for financial approval from the insurance company. I can't afford my medication, my medical equipment or treatment which is affecting the recovery of my spinal cord injury. I'm physically suffering. If there's anything you can do to help, it would be greatly appreciated."
Adding insult to injury for both Claimants and their legal counsel, many of those who have been denied or had their access to necessary treatment terminated by an insurer are subsequently asked at discovery if they are still in treatment. When advised that the Claimant no longer is, defendants will often draw the adverse inference that treatment is therefore not necessary and that the Claimant is “fine". This catch 22 scenario not only has a detrimental impact on a Claimant’s ability to meet the threshold of permanent and serious disability, most especially in chronic pain cases, but supports the insurer’s justification of a reduced offer to settle the claim.
The Problem with “Protected Accounts”
In the absence of insurer funding for their services, rehabilitation providers of all sizes are struggling with growing volumes of accounts receivable and are attempting to balance their longstanding law firm referral relationships with their responsibilities to their clients and the economic realities of running their businesses.
There has been a long-held practice in the rehab community of often waiting for payment of their services until the settlement of a client’s personal injury legal claim, often years down the road. While these deferred accounts are “protected” to be paid upon the ultimate resolution of the claim, that is not to be confused with “guaranteed” to be paid. In fact, there are many instances where treatment providers forego payment entirely or in part on their protected accounts (not including interest charges which are virtually never charged or offered). This can include an unsuccessful outcome in the client’s litigation, or the transfer of the client’s file to a new lawyer who refuses to honour the protected account arrangement, which is often undocumented.
In essence, protected accounts can be viewed as interest free settlement loans provided by treatment providers. They offer a convenient solution for most of the parties in the equation: for the Claimants who benefit by receiving necessary treatment in a timely manner; for the lawyers who do not have to trouble themselves with fighting a first party insurer over a denied treatment plan or a tort insurer over an advance payment; and finally for the insurer who continues to generate a profitable return on funds that would otherwise have been paid earlier for the treatment. In fact, the only party who suffers under the protected account arrangement is the treatment provider, who in attempting to accommodate the best needs of their client has unwittingly become a source of free financing to the market.
The following quote is from the owner of a large home healthcare provider in Ontario evidencing the unfair predicament protected accounts place on service providers:
"We have treatment invoices going back over 5 years in some cases. Protected accounts used to represent less than 10% of our work, which we could manage, but they are now getting beyond 20%. It’s a major challenge for us – I can’t pay my team or my rent with [protected accounts]. Unfortunately, the lawyers who ask us to hold accounts make it a condition of getting the pre-approved work, which we can’t afford to lose.”
By contrast, the following is quote from a lawyer at a prominent Toronto personal injury law firm from a Law Times article (Lawyers Advise Against Treatment Loans – 23 July 2018), reflecting a different perspective on the same issue:
“Often treatment providers are willing to work on the basis of a protected account without interest, particularly if they have a good relationship with a law firm. That can become a cheaper alternative [than treatment financing].”
Treatment Loans from Litigation Lenders
For the reasons noted, personal injury lawyers are facing a declining universe of treatment providers willing or able to perform their services on a deferred payment basis. Recognizing that their clients have a duty to mitigate damages, and the fact that access to rehabilitation services is a vital part of protecting the current and future economic value of their clients’ cases, lawyers are now finally recognizing that third party treatment financing from a litigation lending source may be the most viable solution for their clients in many cases.
In essence, treatment loans are settlement loans whose proceeds are specifically used to pay for treatment related expenses. While the Claimant is still the borrower, their lawyer is appointed to administer the loan or credit line, which is drawn upon as required and directed by the lawyer to pay for specific treatment accounts over the course of the litigation. By releasing payments as required, the fund is preserved against misuse and the overall interest is reduced.
Importantly, as treatment loans are used in order to fulfill a plaintiff’s “duty to mitigate” their injuries, there is a valid legal basis to recover the financing costs incurred from the insurer with several court decisions on the subject.
"Treatment financing has been an essential part of our clients’ recovery programs when the need arises. A client of ours suffered a severe crush injury to her legs in an MVA, and was restricted to medical benefits of $50,000 from the auto insurer. Due to the seriousness of her injuries she exhausted these benefits in approximately 9 months following the accident. BridgePoint stepped in and financed an additional $70,000 of treatment without which she would not have been able to continue her treatment regime, and her recovery would have been delayed. In my discussions with the tort insurer, I received little resistance to my argument that the interest costs were properly claimed in the tort action. Additionally, the threat of additional interest expense was instrumental in persuading the insurer to provide an advance payment to cover some of the ongoing treatment.”
Partner at Graves Richard (St. Catherines, ON)
"I am convinced that had we not accessed funding [from BridgePoint Financial] for the treatment required for this individual, not only would his overall rehab been compromised, he may in fact have lost his life." Christopher Collins of Siskinds (London, ON)
The onus remains predominantly with treatment providers to present alternative sources of funding where insurer benefits have been denied or exhausted and the burden of a deferred account is too great to bear. Lawyers should expect this to increasingly be the case in current market conditions, which are testing the financial breaking point of many rehab service providers.
As treatment providers close the door on protected accounts out of financial necessity, lawyers are recognizing that treatment financing may be the only viable solution to the treatment funding gap. Many are now shifting their focus to recovering the financing costs from defendants who have unreasonably denied their clients treatment plans or advance requests. These lawyers are obtaining commitment letters, or “term sheets” from lenders to serve as notice to the defendants, and are structuring the treatment loans in a way that best sets the stage for recovery of the interest costs in court. Ideally, more decisions will emerge in favour of Claimants on the issue of interest recoverability where funds have been used to access vital medical and rehab services.
Accident victims working their way through the personal injury litigation process are typically coping with anxiety, stress and depression relating to reduced income and the uncertainty relating to their access to rehabilitation services.
Litigation financing in the form of settlement loans to pay for daily living expenses and treatment loans to maintain access to equally important medical and rehabilitation services serve an important, and increasingly strategic role in facilitating access to justice for Claimants, and leveling the power balance that has been increasingly favouring insurer defendants with their virtually unlimited resources in time and funding.