A New Investment Strategy: Paying Claimants' Court Costs.

A new kind of player is making its way onto the claims scene: lawsuit investment firms that give money to plaintiffs in return for a cut of any subsequent settlements or court awards.

These firms help plaintiffs win bigger amounts from well-capitalized defendants and, ultimately, their insurers. Those involved say that without this early financial help, plaintiffs lacking financial resources might buckle under hardball negotiating tactics. It's a risky business, though. If there is no settlement or if the plaintiff loses in court, the investor loses the money.

One practitioner of lawsuit investment, attorney Harvey Grossman of West Orange, N.J., has fronted money to clients for about five years. He started purchasing settlements paid by the state's Joint Underwriting Association and its successor organization, the Market Transition Facility, both of which were created by New Jersey to cover motorists that insurers would not handle.

He continued to develop his funding business, now called the Lions Group, with payments coming from insurance companies and government agencies.

Grossman said defendants usually operate under one of two strategies.

"They get in early, settle quickly and cheaply, and save the costs of litigation," said the former public defender, "or they play hardball, put plaintiffs to their proofs, and that is the situation in which the funding business comes in. It's very much a David-and-Goliath situation then.

"Some of the strongest and most powerful institutions in the world are insurers," he added. "When you're in that situation, where else are you going to turn to level the playing field?"

In a recent case, Grossman said the claimant was leaning toward accepting a $20,000 settlement offer because he was in immediate need of funds. The claimant's attorney thought the case merited a higher settlement, so he contacted Grossman, who advanced $20,000 to the claimant. Six months later, the case was settled for $65,000, and Grossman recouped his investment, with interest.

The practice of fronting money to claimants or lawsuit plaintiffs is still in its infancy, said Kirk Hansen, director of claims at the Alliance of American Insurers, Downers Grove, Ill., and he expects to see more. "We've been interested in this and have watched this from the beginning," he said. "It's not a benefit to society to have an increase in the number of lawsuits tying up our court system. There are a lot of serious injuries for which no one is legally liable."

Lloyd H. Milliken Jr., president of the Defense Research Institute, a Chicago-based organization for defense, insurance and corporate counsel, said the practice hurts the legal system. "This kind of thing will simply encourage the bringing of additional lawsuits, many of which will be without merit," Milliken said.

If a new way of promoting more lawsuits is found, it will increase claims, payments and insurance premiums, said Milliken, who is a member of the law firm Locke Reynolds LLP, Indianapolis.

"This is a subject that is of interest to DRI, and we will be studying it in much more depth," he said.