Origins of pre-settlement funding
Pre-settlement funding, legal funding, or lawsuit financing all these names serve to define the designated functions of this single source of finance.
Originating from the olden British doctrines of champerty and maintenance, legal funding started in Great Britain. This initiation took course mainly around the time when investors and landowners realized that patronizing claimants in lawsuits could make immense profits. They were sure that the court might grant the claimants something or anything if they bring in a strong claim. Hence, these individuals offered household financial support to claimants for the pendency of their lawsuits after assessing the strength and gravity of their claims.
Although seemingly similar, the practice of supporting plaintiffs, how it is called lawsuit funding today, has dramatically transformed into a bona fide lending service for the benefit of the people.
Modern legal funding saw its birth in Australia between the 1990s, when insolvency practitioners were permitted to enter into litigation funding contracts with insolvent individuals.
The Australian parliament granted this permission and required such financed litigations to be recognized and mentioned in the company’s books as an asset. More and more financing companies emerged due to the passing of this law, making legal funding a known thing in the region back then.
Another boost was received by the industry when an Australian court in one of its 1992 case decisions declared class-action lawsuits an efficient way to deal with claims coming in groups. This created a novel market for insolvency litigation financing entities to offer their services.
In the succeeding years, capital groups were seen launching dedicated windows for pre-settlement funding to the plaintiffs in Australia. The industry then received official encouragement by the judiciary when the Australian High Court recognized third-party litigation funding as “serving a bona fide purpose of facilitating the cause of justice.”
Assertions holding litigation funding to be contrary to the public policy were also negated in the decision declaring the same to be in line with due process requirements. Meandering over time, the concept of lawsuit funding reached the US with certain modifications and changes. Although still relatively new, the legal funding history has seen a boom in a positive response from litigants belonging to the masses and has penetrated into the American legal space at a brisk pace.
Pre-settlement funding today: The market practices
The pre-settlement funding market in the US today is densely competitive, if not saturated for that matter. Pre-settlement funding owes its popularity and recognition in the US to the ever-growing middle class, and the sharp rise in average medical costs over time. These make plaintiffs of personal injury lawsuits compelled to opt for lawsuit funding programs and divest themselves from all possible risks.
Several private, long-standing, and even fresh financial institutions have taken up the lead to offer economic alleviation to plaintiffs struggling through crisis and hardships.
The pre-settlement funding industry is recognized at a national level in all states. However, most states still do not regulate legal funding through any legislative instruments or statutes. This gives birth to the myth that lawsuit funding may be risky for being too casual or that the companies offering funds are unleashed giants, unhindered and unrestricted by any governmental policy.
This myth, fortunately, remains a largely false belief. Although deficient in legislation or statutes, the lawsuit funding industry is governed under best practices to protect the plaintiffs’ best interests. These practices are abided by all funding companies providing legal funding and enjoying membership of the American Legal Finance Association (ALFA). ALFA is the national trade association of all such financial firms and has contributed to promoting regulatory practices across the country.
The association was initially involved with the then New York Attorney General to draft a set of best practices to be followed by the local legal funding companies. This affiliation with the AG paved way towards adopting regulatory legislation, making Maine the first state in the country to pass regulations governing the legal funding industry.
Lawsuit funding companies: Good or bad?
The major themes and mechanisms of how lawsuit funding companies function are similar across the industry. However, specific details and the companies’ way of doing things determine whether they qualify as a recommended lawsuit funding company or not.
Plaintiffs are provided non-recourse cash advances, and the companies receive their investment once the lawsuit is concluded. Pre-settlement funding companies also charge a certain percentage of the entire amount financed to the plaintiff as interest or fee. This amount is the very pivot that defines whether the company makes a profit or sustains a loss in its overall business operations. Suppose the company charges exorbitant rates so much that the company’s claim exceeds the total amount secured as an award or settlement. In that case, the plaintiff is left no better off. If the plaintiff cannot receive any other amounts from taking home after the company’s share is deducted, he still stands at square one, except that his medical bills and expenses went covered during the pendency of the suit.
Moreover, the most attractive part of settlement advances is the instant availability of funds for the plaintiffs. Cashflow problems faced by the plaintiffs and the immediate solution offered by legal funding programs at their disposal is a no-brainer. Hence, a lawsuit funding company must allow for applications to be made quickly and easily. The processing of applications must take a minimal ideal time, and the funds must be released to the plaintiffs with no delay. These factors, amongst others, significantly contribute to form a good or bad opinion about a lawsuit funding company.
Except for the very few companies that have been involved in fraud before or where the owners served time for financial crimes, pre-settlement funding is safe.
How does lawsuit funding work?
It doesn’t remain a secret that lawsuits and court procedures are a matter of months or even years and just cannot be expected to wrap up within days or weeks. During such periods, what happens if the plaintiffs cannot earn themselves a living and are forced to face a financial crisis? They might have sure made claims for massive damages in addition to monetary compensation for themselves. Despite that, what happens till the lawsuit is not concluded?
Pre-settlement funding is, for the plaintiffs, a means of obtaining instant finances against any pending litigations they contest. These are only available for persons who have sued someone else and enjoy chances of recovering money from a court award or settlement.
In a lawsuit funding arrangement, these possible future incomes are traded against cash advances today. Plaintiffs can utilize these cash advances to avoid eviction, make car payments, buy food, purchase medicine, or pay for a plethora of other essential living costs.
The average cash advance received by plaintiffs is $3000, making it adequately enough to meet household expenses and equally reasonable to be covered in an award of damages. However, it must be remembered that securing a favorable award of damages or reaching a nominal out-of-court settlement is not always the case. The odds differ vastly in each case, and not all plaintiffs go home happy. After a plaintiff has obtained and used up the funding received, what options does he have if the lawsuit does not conclude in his favor?
In such a case, the plaintiff simply walks away with no obligations towards the funding company. The company cannot ask or bother the plaintiff to repay even a single penny.
This luxury available to them is different from conventional loans. Conventional loans, including short-term independent debts, bank loans, or credit card debt, to say a few, only add up to the plaintiffs’ burdens unconditionally. The lenders in unconventional loans cannot care less if the plaintiff is victorious or loses. Irrespective of the case outcome, they are liable to repay the entire principal amount, along with the inhumane interest compounded on top of it.
Often, unsuccessful plaintiffs who had opted for conventional loans are left in an even worse position than before filing the lawsuit. This is what makes the pre-settlement advance facility the most desirable option for plaintiffs.
Settlement funding and its costs
It is believed that settlement funding programs come with exorbitant interest rates, often much higher than the nationally prescribed or market prevailing interest rates. This might be true at most times since lawsuit funding is charged somewhat more elevated than conventional loans. The rationale for this rests in the risk that is totally taken over by the legal funding company. If the court finds that a plaintiff has failed to make a valid claim and refuses any award of damages, the plaintiff does not owe any money to anyone. In such a case, it is the company that loses its income from the interest as well as its investment, being the funding amount handed over to the plaintiff to meet his needs.
Now, allowing the company to bear and survive these losses and still enable it to run profitably, charging higher interest rates becomes a must.
Hindered access to legal funding
Lawsuit funding is a non-recourse debt, which means that the only guarantee that the lender has is limited to the successful settlement collateral that is retained as security. When a future settlement itself is kept as collateral, there are absolutely no chances for the lender, the financing company, to get paid if the case loses. Just because legal funding programs resemble a non-recourse loan arrangement, these cannot be proclaimed as loans, as done in some states. Some state authorities have declared lawsuit funding programs to be mere loans. With such wrongful assumptions of their very nature, funding companies are prevented from marketing or exhibiting their funding programs as strikingly separate from the conventional loans, playing as a major obstruction in their business.
Moreover, lawsuit funding does not require the applicants to have any minimum credit score since funds are released to applicants solely based on the strength of their claims and the merits of their case. This goes against the policies in certain states, where applicants below a certain level of credit score cannot be allowed any more debts.
Unreasonable policies of those states, in this manner, act up to provide a disadvantage to their own citizen plaintiffs. But the question is, who is really benefiting from the prohibition of legal funding?
Who benefits from disadvantaging citizen plaintiffs?
The benefit of these unreasonable policies, unfortunately, are reaped by insurance companies alone. It is apparent that pre-settlement funding programs buy the plaintiffs ample time to contest active litigations. They empower the plaintiffs to sustain themselves and provide for their families during the pendency of cases. This allows them to survive and hold on to any financial constraints while the case is still proceeding. This perseverance acts as detrimental to insurance companies and the defendants personally. Insurance companies are always quick at coercing the plaintiff to settle the matter at a much lower valuation than deserved. They are on the hunt for desperate plaintiffs and utilize their desperation to resolve the matter for peanuts when in actual the courts could have granted them damages worth a lot more than the settlement amount.
Hospitals as defendants have strong insurance backing, which helps them settle matters of medical negligence brought in by individuals much easier. The plaintiffs, who might now need complex medical treatments, professional assistance, and therapies to recover, would definitely need ample cash at hand to afford all such medical bills. The hospitals are quick to extort agreement on undervalued settlement amounts from the crisis and hardships they face.
The utility of pre-settlement funding today
It is illegal for attorneys in the US to financially support their clients. Even when they don’t, the financial hardships faced by their clients can often take a toll upon the attorneys, who may be consumed with the client’s desperation for money to meet their basic needs. In this scenario and for all the reasons above-mentioned, pre-settlement funding currently stands as an ideal source of finance for plaintiffs within the US.
Apart from alleviating acute financial constraints inflicted upon them, the financing also helps them meet their daily expenses during the pendency of the suit absolutely risk-free.