Wednesday, July 30, 2014

Advances Against Settlements

In Florida workers' compensation, we have seen significant litigation over "advances." This term is familiar in Florida workers' compensation because the statute (Fla. Stat. 440.20) specifically provides for advances paid by the employer/carrier in certain instances. But another kind of "advance" is in the news now and is an interesting topic. 

Workcompcentral reports today that the Institute for Legal Reform, part of the United States Chamber of Commerce, has asked Illinois to look into the subject of lawsuit lending. Essentially, there are lenders who market their services to people who are involved in lawsuits. They do not call their lending a "loan," but an "advance." If the person prevails in their lawsuit, the advance/loan is repaid from their judgement or settlement. If they lose their lawsuit, then they do not have to repay the advance/loan. The balance is written-off by the lender/advance provider. 

The Institute sent a letter to the Illinois Commission Chair, stating that "lawsuit lending is an important public policy issue." The letter asserts that "the Illinois Workers Compensation Act expressly prohibits assignment of any payment, claim, award or decision." In short, the Institute is asking the Illinois Commission to investigate the practice of such lending, or advances, in Illinois. 

It is an unfortunate reality of our American economy that some people live paycheck to paycheck. We are notoriously poor savers in this country. Some estimate that as many as 25% of American families have no savings at all. Among those that do save, the average savings account balance is about $3,800.00. This website also says that the average American household annual income is $43,000.00, which is about $827 a week. Using these figures, the average savings account balance ($3,800) would be depleted in less than five weeks of no earnings or income. 

Of course these calculations are based on averages. Some will have more savings, but an appreciable population are believed to have no savings at all. When workers' compensation benefits are instigated immediately following a work injury, many states nonetheless have waiting periods. In Florida, there is no compensation paid for the first seven days of disability. However, if the disability lasts more than 21 days, then that first 7 days is paid later. This is all in Fla. Stat. 440.12. So during the first three weeks following an injury, an injured worker would receive two indemnity checks if everything works smoothly. 

Of course, there will be those claims in which compensability is denied, or in which disability is disputed. In those instances, payment of indemnity (lost wage) benefits may be delayed pending claims, petitions, proofs, mediation, or trial. 

In some ways those injured at work may be better off than others. One of the trade-offs of workers' compensation is that the benefits are designed to be paid periodically and to begin fairly rapidly. In a personal injury action outside of the workers' compensation process, an injured person might receive no compensation for lost wages until a lawsuit reaches trial/verdict or is settled. The waiting period for income replacement in those cases might be months or years. 

Enter the "lawsuit lenders." The term "lender" may be inapplicable but it is the term used by the Institute. According to one such provider, the "cash advance" is not a loan. Their "frequently asked questions" page explains there "are no credit checks and you do not need a job." The injured person only repays this advance and the "advance fee from the proceeds of your settlement, if and when the case settles." If the injured person does not prevail, then she or he pays "Nothing. You keep your cash advance and you repay nothing to us."

So what does it cost? This particular provider charges 22.5% for the first six months, and 12.5% for each six months thereafter. Their website says that a $10,000 advance repaid in a year will cost $13,500, two years is $16,000 and three years is $18,500. These are detailed in a chart that compares this company's charges to two unnamed competitors. They say that with one of their competitors, a $10,000 advance repaid in a year will cost about $18,000, two years is about $32,000 and three years is about $58,000. 

The Institute urges Illinois to investigate the practice, reminding them that "the Illinois Workers Compensation Act expressly prohibits assignment of any payment, claim, award or decision." 

Does the Florida law preclude or limit such lending or "advancing?" The assignment of Florida workers' compensation benefits is addressed in Fla. Stat. 440.22: "No assignment, release, or commutation of compensation or benefits due or payable under this chapter except as provided by this chapter shall be valid, and such compensation and benefits shall be exempt from all claims of creditors, and from levy, execution and attachments or other remedy for recovery or collection of a debt, which exemption may not be waived. However, the exemption of workers' compensation claims from creditors does not extend to claims based on an award of child support or alimony."

Would this affect the "advance" practice? That is for others to decide in that case, when and if the issue is ever raised. The Institute letter  urges Illinois to investigate the practice. It also says that the practice is drawing the attention of "attorneys general and other interest groups." It is a subject about which we may see more news in months and years to come.

Update 080414: Attorney Dennis Palso commented on LinkedIn to advise that The Florida Bar has addressed this subject. It is an interesting read also. 

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