An industry is growing around medical malpractice lawsuits

Many New Yorkers may be aware that when a patient sues their medical provider for malpractice, their attorney will take a substantial cut of any settlement or judgment the patient receives.

This arrangement, called a contingency fee, has been around for a long time. Plaintiffs’ lawyers have also for a long time been allowed to front certain costs and expenses associated with a lawsuit, although the patient must pay those costs back.

Even though contingency fees have been around for a while, according to one insurance trade journal, many members of the public do not fully appreciate how they work.

While in theory it helps those who have valid legal claims pursue them, the contingency fee also means that, effectively, providers accused of medical malpractice and their insurance carriers are paying both the patient and the attorney.

Another industry, called third-party litigation financing, is also emerging, and both medical professionals and those who defend them in court need to pay attention.

Third-party litigation financing can impact large and high-profile cases.

However, in the world of medical malpractice, the most common type of litigation financing is when a patient takes money from their lender for the patient’s living expenses.

Arguably, when a provider issues a letter of protection agreeing not to pursue a bill in exchange for a share of any recovery, they provider is engaging in third-party litigation financing.

In theory, the patient needs helps with bills and expenses while they are waiting for their settlement. Provided they recover funds, the patient then promises to repay the lender from their lawsuit. The lender may also collect interest, often at a handsome rate.

As is the case with a contingency fee, one problem with this type of funding is that it gives people an incentive to drive litigation forward even when the facts suggest they should do otherwise. After a funding arrangement, plaintiffs must recover enough money even to break even on their lawsuit.

Providers, insurers must deal with third-party funding in their strategies

Several states have taken steps to regulate third-party litigation financing. New York is not one of those states.

For now, law firms which defend against medical malpractice claims will have to account for the growing popularity of this type of lending in their legal strategies.