In part 5 of our series we discuss Funding Your Practice.
There are significant financial demands to running a successful personal injury practice. These demands are greatly increased when you are in the process of setting up and establishing a new personal injury practice. As stated above, you will have virtually no choice but to offer your services on a contingent fee basis which means you will collect fees some number of months or years after you begin working on a file and you will carry most of the disbursements associated with the file for this period of time as well. At the start of your practice, you can expect a significant delay in the inflow of cash. Conversely, the outflow of cash will begin before you even open your doors for business. Starting in the planning stages of opening your firm, you will begin to incur the typical overhead expenses of a law firm, such as rent, salaries, law society fees, insurance, equipment purchase, etc.
Before setting out on your own or in partnership, you must ensure that you have enough money in the bank or access to adequate credit to ensure that you can continue to pay your overhead costs when cases are pending. You don’t want to find yourself in a situation where your judgment about the value of a case is effected by your need to meet your financial obligations. In my experience, banks will be reluctant to lend to anyone who does not have significant collateral that they can pledge as security for their loan or a long and proven track record of success in their law practice. Banks have difficulty recognizing the value retained in a personal injury law practice by way of work in progress (WIP) and paid disbursements. On complex cases, the paid disbursements can easily run into the hundreds of thousands of dollars. In a large practice, paid disbursements can amount to millions of dollars. However, banks can not view them in the same way they view traditional accounts receivable because their repayment is contingent on the outcome of the case and there is significant delay in recovery. Prudent financial management of your practice will see you relying on internally generated cash flow from cases that you are resolving to finance disbursements on new and ongoing cases. From a tax perspective, this type of “equity financing” is an effective strategy for deferring income and I have been told by our firm’s tax advisor the paid disbursements are deducted from income as they are incurred (I do not intend to give tax advice and suggest you check with your own advisor with respect to this point).
For everyone, including the most senior personal injury practioners, file selection is very important. However, at the outset of your practice, file selection is of the utmost importance. When you are first starting your practice, you may feel like you have to take every case that you can get your hands on. Resist the urge to take on a case that you feel is a long shot either because of a very difficult liability situation or modest damages that will likely not meet the threshold for non-pecuniary damages and health care expenses in a motor vehicle case. The early going is the worst possible time to get yourself backed into a corner on a losing file where you have no choice but to dedicate significant time and disbursements to a file where recovery is highly speculative.
Above I indicated the importance of obtaining relevant documents at an early stage in the litigation. This desire conflicts with your own need to keep your file disbursements to a minimum at the outset of your practice. One solution to this dilemma is to request that the tort insurer pay for clinical notes and records, hospital records, etc, before you agree to request and produce them. The tort adjuster has an obligation to set a reserve on the file and will be as anxious as you are to review relevant medical records. Additionally, you can point out to the tort adjuster that Section 258.3(1)(c) of the Insurance Act that provides that an action for loss or damage from bodily injury or death arising directly or indirectly from the use or operation of an automobile shall not be commenced unless the plaintiff provides the defendant with theinformation prescribed by the regulations within the time period prescribed by the regulations. Sections 2(2)(c) and (d) of the Regulation indicates that thisinformation includes medical reports and clinical notes and records from the date of the accident to 120 days post accident but the obligation to produce the records does not apply unless the defendant pays all reasonable expenses incurred in obtaining these documents.
Like the tort adjuster, the accident benefit adjuster is equally as interested in reviewing various relevant medical documents and will typically request that authorizations be signed providing for the release of thisinformation to the accident benefit insurer. I will typically advise the adjuster that we will obtain all documents that they reasonably require to determine entitlement to the benefits that my client is claiming so long as they agree to reimburse me for the acquisition cost of the records.
If you are retained on a significant damages case at an early stage in your career, but realize that you will have to incur significant disbursements to get the case ready for trial, one solution often employed by many personal injury practioners is to hire external counsel to assist them with these types of complex cases. Once a fee split is negotiated, the consulting lawyer assumes the obligation of financing the case through to settlement or Judgment. If the case is lost, the write off of disbursements are the responsibility of the consulting lawyer. This type of arrangement allows you the opportunity of being involved in the strategic decisions made to advance a complex case and perhaps the opportunity of being involved in the trial of the action, without the associated risk of losing potentially hundreds of thousands of dollars if the case is lost. More importantly, the client will likely have a better result by virtue of the simple fact that you were able to dedicate adequate resources to the development of the file.
If you do find yourself in a situation where you need additional capital to operate your firm and the traditional banks are not prepared to assist you, you may wish to consider one of a number of litigation loan companies that have begun operating over the past several years. These companies offer financing to both the clients involved in the cases and the lawyers that are litigating the cases. Typically, the loans do not have to be repaid until the conclusion of the case. A word of caution however, the loans attract very high rates of interest and should be considered only as a last resort.
Watch out for the last part of our blog series on Developing and Funding a Plaintiff’s Personal Injury Practice next week.