The Last Boy Scout. Or, why am I the only person troubled by these things?

The longer i'm in the business of advising trial lawyers and their clients on the use of structured settlements as part of their settlement plan, the more amazed I am at the constant low level ethical compromises that many brokers make in an attempt to maintain viability in this industry.

Most people are familiar with the long standing practice that was institutionalized at most of the major casualty insurance companies of creating "approved broker" lists to write their companies settlement annuities, with the proviso that they had to return some of the commission back to the casualty company in some manner or fashion. The means might have differed from company to company, but the end result was "commission sharing", rebating, kick backs, what ever name you want to call it. The legality of this tactic is now going to be decided in court thanks to the Macomber vs Travelers case, which first exposed the practice to the larger legal, regulatory and financial community, but to my mind, the ethical  propriety of having an undisclosed commission arrangement that the injured party and their counsel knew nothing about was always morally and ethically suspect from the start. Lets face it, if you have to hide it from someone you probably shouldn't be doing it in the first place.

We then had the creation of "approved life markets" at various casualty companies, again with the patina of trying to select the best life companies to fund annuities, but in fact being nothing more then a steering arrangement between multi-line casualty companies to reward other companies for putting their life market on their "approved company" list. The idiocy of their arguments that they wanted the "safest companies" is that most approved lists systematically excluded Mass Mutual, New York Life or Pacific Life, three of the strongest, most highly rated life markets for annuities, because, oh by the way, they didn't have casualty subsidiaries that could reciprocate and steer premium back to other casualty markets as well. I've heard that this practice is starting to see it's last legs, largely due to the fact that most companies don't want to explain to regulators why this isn't a case of collusion and steering business.

As factoring companies arrived on the scene and brokers with big installed bases of clients from years of writing annuities  were wooed for those lists of names, we have been treated to the unseemly and ethically questionable practice of settlement brokers who encouraged clients to get into annuities for a very good reason, doing a 180 degree turn and either directly or indirectly encouraging them to factor out of their contracts. Oh, and by the way they were being paid commissions or fee's by the factoring companies, typically with out any disclosure of their compensation, for providing the lists and having clients factor their annuities. Again, no regulatory over site, no hands slapped by industry associations, just a convenient ignorance of the practice as clients cashed out of contracts at premiums to actual value. Sadly most of the people engaging in these practices were "plaintiff advocates" who should have known better but couldn't see past the cash they could make for simply providing a name to a factoring company.

Well, just as I thought maybe, just maybe we might be seeing an improvement in the more egregious alliances and practices in our industry now comes word that we have alliances being struck between legal finance companies and settlement brokers that go way, way beyond simply joint marketing or referrals. From what I've been told by three separate brokers, is that they have been notified by long standing trial lawyer clients that the legal finance firm they do business with will cut them a substantially better deal on the terms of their litigation financing, but only if they agree to use exclusively the services of a particular settlement broker with whom they have a marketing arrangement. I would have found it hard to believe except I got a call from a trial lawyer client of mine who was offered the same deal.

Stop and think about that one. The attorney, who needs the money to finance his case, is offered a substantial inducement to throw his existing broker under the bus in order that he might get a considerably better loan, on better terms to finance his case. Hard ball effective business strategy and tactics, or coercive lending practices? I'm going to let lawyers and settlement professionals answer that question themselves.

All I do know is that if the same lending practices occurred in the consumer lending arena, I have little doubt that "consumer activists" and outraged trial lawyers would be complaining to regulators and filing class action suits. All you have to do is look at the H.R. Block litigation which is based on the premise that H.R. Block simply failed to notify customers that they merely had a tie to the bank financing their tax return loans, and received a very small stipend on each loan and that case resulted in a huge headache for H.R. Block. What we have here is much more pernicious, but because the trial lawyers need the cash and can't typically go to traditional lenders, they are willing to take a pass on the ethical high road because THEY need the money.

I'll be doing several stories and interviews on not just this topic but the entire legal finance industry and it's growing influence and leverage over trial lawyers nationwide. I warned in a post last year that the legal finance industry was going to be a growing threat to the settlement business, and now it appears it is starting to come to pass. No one has more power over a debtor then his lender, and the power of that arrangement is going to start to be felt industry wide at a level that will shock most settlement professionals and trial lawyers if they open their eyes to what is going on.

Send me your experiences on any similar situations you've run into, or argue with my premise if you'd like. 

Posted on September 14, 2006 .