Recent market trends in litigation funding and the impact
By AdvocateDaily.com Staff
In a recent Q & A session with AdvocateDaily.com, Stephen Pauwels, co-founder and principal of BridgePoint Financial Services, a Toronto-based specialist litigation finance firm, discussed the effects of recent market trends and how some firms are responding to them.
Pauwels pointed to how the personal injury litigation market in Ontario is facing significant headwinds. Legislative intervention, insurer entrenchment and other influences have greatly challenged the standard contingency-fee business model of plaintiff personal injury practices.
1. What are some of the financial risks that lawyers/law firms have to take on in connection with their cases?
"Law firms who get paid for their services as billed assume little financial risk. Those that do contingency-fee work on the other hand take on significant financial risk, and face unique financial challenges relative to any other professional service businesses.
"Not only must they wait years on average to be paid for their services — and then only where each underlying case is successful — but additionally they have to finance the disbursements to build each client’s claim. Add the fact that these firms are restricted in accessing bank financing and it’s a very challenging business model to manage."
2. Why don't lawyers who do contingency-fee work receive adequate funding from traditional lenders?
"As a former investment banker, I can confirm what most of these lawyers already know — banks simply don’t understand their business model. Their lending methodologies are highly standardized, and these practices don’t fit into their square hole.
"Banks want more tangible assets, such as inventory, property, and accounts receivable as security for their loans, and higher predictability in cash flows, than these firms can offer. Even a bank that liberally considers a firm’s disbursements as accounts receivable would consider those beyond 120 days old as uncollectable. As far as borrowing against legal fees? Not a chance."
3. What happens when lawyers can't afford the financial burden of the cases being brought forward by plaintiffs?
"In the absence of more traditional third-party financing, plaintiff lawyers have had to rely on internally generated funds, which are fees from settled files that they recycle back into their practice. Where these retained earnings are insufficient, they look at more esoteric funding sources such as 'supplier financing.' These are the experts and other service providers who agree to wait until there is a settlement for payment.
"This shifts the financial burden onto the experts, who would rather not have to also act as de facto bankers to their clients. The other issue is that the objectivity of an expert can be called into question if they are only paid at the end of a case."
4. What influences are you seeing in the market right now affecting lawyers’ financial risks?
"The plaintiff personal injury market in Ontario is suffering more than any time in my 20 years in the market. A perfect storm of regulatory and legislative changes, recent case law and other market influences have changed the rules in favour of institutional defendants at the direct expense of accident victims.
"Insurers currently have no incentive to settle claims in a timely manner, unless for cents on the dollar. Plaintiff lawyers are having to invest more in time and disbursements to get reasonable settlements. No firm has been unaffected. As a result, there is a fair bit of consolidation happening.
"I hate to use a crude analogy but the herd did need culling. Many lawyers were spending more on advertising than building their files. We were seeing firms with inventories of more than 500 files per lawyer. It wasn’t a healthy market, and I’m not surprised that insurers made a calculated decision to halt production by refusing to pay for the end product.
"Lawyers now have to be much more disciplined in their file selection and they have to be prepared to go to trial on any case.
"Those firms with better access to capital are in a much stronger position to weather this storm than those who do not. That is where we can help. Those who are still sticking to the assembly line model won’t survive. They may just not know it yet."
5. How does BridgePoint assist in this area? What's the BridgePoint funding used for?
"Most lawyers in Canada recognize BridgePoint as a source of financial support for their clients. What many are surprised to learn is that funding solutions for law firms — not plaintiffs — is actually the largest and fastest growing part of our business.
"While we don’t have any restrictions on what our funding can be used for, for the most part, lawyers use it to invest in the disbursements they need to build their cases. We can and do offer direct loans to lawyers, but the major part of our disbursement funding is provided through our Expert AccessTM program. This is a proprietary service we offer in association with hundreds of experts and IME (independent medical evaluation) companies across the country that provide deferred, interest-free payment arrangements for their assessments.
"In addition to the deferred payment benefit, lawyers are using it to help source new expert relationships, which is a major benefit to our expert partners. It’s becoming as much of a matchmaking service as a funding platform, which is a real value for all parties."
6. Do you think the contingency fee model is at risk?
"I believe and hope the regulatory threat of that has passed. It would be a serious step backward in access to justice for accident victims if fees were capped below the current model. In my view, contingency fees are the only way that legitimate plaintiff lawyers can afford to take on the most serious cases and even attempt to match the resources that insurers are investing to fight them. If a reduced cap was installed, many of the top lawyers would be forced to move on."
7. How else are firms able to weather the storm?
"We are seeing more law firms in Ontario pass along a financing charge on their paid disbursements to their clients. This may be the cost of their own bank line or that of a third-party funding lender such as BridgePoint. This is the standard practice in other markets outside of Ontario, but it has never been the case here for whatever reason.
"I believe it’s because the firms that did plaintiff PI work were traditionally very large, typically full-service firms that could easily afford the more modest out-of-pocket investments at the time. That’s no longer the case.
"Now the only barrier to that arrangement seems to be competition. If the firm down the street doesn’t charge for disbursements then you can’t or you might lose that prospective client. But, of course, if you can’t afford the new client yourself, something’s got to give. The Greater Toronto Area firms where competition is the highest might be a holdout but we are already seeing these arrangements being adopted in other Ontario markets."
8. Are there any other financial market developments that you see altering the legal landscape in the near future?
"The advent of legal expense insurance here in Canada, in my view, will continue to transform the legal services market, just as it did in the United Kingdom. As the insurance covers disbursements in unsuccessful claim scenarios — even abandoned and dismissed cases in some instances — without question that gives us a great deal more latitude to fund the firms who use it.
"If I was a lawyer, I’d be all over the product as I don’t think some of the coverages currently being offered are sustainable for the insurers in the longer run. It’s definitely a buyer’s market. The fact that their disbursements are insured should equally give lawyers more peace of mind in using third-party funding to build the claim."
9. There seems to be a number of international litigation finance companies entering the Canadian market lately. How is their model different from BridgePoint?
"Litigation finance as an asset class has become quite trendy of late, attracting many leading global institutional investors. These funds, for the most part, are chasing a different segment of the market than we are. They are elephant hunters, seeking to place big bets by financing both fees and disbursements in large commercial litigation cases for a major contingency share of the damages.
"It’s a binary investment prospect for them. Heads they win big, tails they lose everything. As a result, they expect a large contingency fee for assuming the risk they’ve taken away from the law firm, as well as some control over the direction of the case, which we never would. Our funding model even for commercial litigation is more modest and in keeping with what the courts here are used to. Regardless, it will be interesting to see how this market in Canada continues to evolve."