Legal funding, also known as litigation funding, is a relatively new industry. Legal funding companies provide plaintiffs in personal injury lawsuits access to fast capital to pay for daily living expenses and emergency expenses as they await the settlement of their claim. This allows plaintiffs to pay medical bills, rent, utilities, and other costs to maintain their lifestyle threatened by a catastrophic injury.
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Controversies Surrounding The Litigation Funding Industry
This industry, which has become more prominent in recent years, is not without controversy. For example, in some states, the non-recourse funds that plaintiffs receive are interpreted as loans (even though the plaintiff is not required to repay the funds if they lose their case). Since these states regulate the amount of return a funding company can charge a plaintiff, legal funding companies either do not operate or only fund large amounts in these states. However, most states do not interpret legal funding as a loan since the funds released to the plaintiff are not based on credit history or income but the claim's merit. Additionally, these funds are non-recourse, which means that if the plaintiff is not successful in their pursuit of a claim, the funds are not required to be repaid to the company that invested.
With the rise of legal funding across America, Insurance companies are pushing for more strict regulation. While this may look like the insurance companies fighting for the little guy, the truth is much different. Daniel DiGiaimo, Founder and CEO of Baker Street Funding, says, "Insurance companies are terrified of legal funders. The reason for this is simple; we provide plaintiffs with access to funds so they can pay their bills while their attorney fights for fair and just compensation. This gives these plaintiffs a lifeline and allows them to decline lowball offers that these insurance companies are notorious for making. You see press releases all the time with an attorney announcing a jury verdict for a client that had a final offer amount that is a fraction of the final award." What Mr. DiGiaimo is discussing in this quote is, in fact, quite common in the legal industry. A simple search of recent verdict announcements on social media will show thousands of cases that settle for staggeringly large numbers. For example, a recent verdict in South Florida showed that Morgan and Morgan secured a judgment for their client of $2,100,000 with a last best offer of $500,000. This situation is typical, and giving plaintiffs the power to leverage legal funding companies is costing insurance companies real money.
Legal funding companies charge very high rates of return to their clients. Typical legal funding contracts can be anywhere from 35-47% a year. This is because the company is providing the fund's risks their principal and will not get paid back if the case is unsuccessful. This does happen quite often and is why legal funding companies have strict standards for the cases they invest in. While the rate that companies charge can be high, the plaintiff's value can be astronomical. In most catastrophic personal injury claims, the plaintiff's life changes drastically and sometimes permanently. Typically, these individuals cannot work and thus are unable to generate income to pay their bills. The average American only has $2,000 in savings, and insurance companies know that. That is why you often see these companies making meager initial offers on claims. They understand that the plaintiff sometimes cannot afford to take a case to trial because of the inherently extended amount of time that it takes. If a plaintiff cannot pay their bills, they will most likely accept a low offer on their case no matter what their attorney tells them about its future value.
This is where legal funding companies level the playing field. The case in Florida referenced above is a perfect example. If that plaintiff could not pay their bills and could thus not survive, their only chances would be settling the case for the offer of $500,000 or taking out legal funding. In this specific example, if the client did not take out legal funding and accepted the offer, they would have lost over $1.5 million in case value. Subsequently, the insurance company would have saved the same amount.
A Large Amount Of Lobbying
Additionally, there has been a large amount of lobbying both for and against the litigation funding industry. Certain states have instituted restrictions on how much a legal funding company can charge. For example, in Illinois, a company's rate is not to exceed 36%, and no additional fees are allowed. As a result, many companies have withdrawn themselves from the Illinois market. Other companies have capped the dollar amount they will allocate to cases in the state. Ultimately this hurts plaintiffs and could potentially benefit insurers. Suppose insurance companies know that legal funding is either restricted or not allowed in a given state. In that case, they have more chance to get the plaintiff in that state to accept a low settlement offer because they do not have an option for financial support. Some people argue that 36% is more than enough for legal funding companies to charge and make a profit. These people don't understand that there is a large amount of inherent risk in legal funding, and sometimes, the risk premium of a certain case requires a higher rate of return for investors to agree to invest in the case.
Finally, some states, such as Kansas, outlaw legal funding entirely. They do not allow companies to take an equity stake in a claim which ultimately hurts plaintiffs in that state. Legal funding is a choice, and by not allowing companies to invest in cases through a mutually agreed upon contract, plaintiffs are at an extreme disadvantage against large multi-billion-dollar insurance companies. Regulation like this is damaging to the state's residents, and there needs to be legislation enacted to allow legal funding companies and their clients to operate within specific guidelines that the state legislature will set.
Legal funding is still a growing industry, and its future is not clear. There may be regulation in the space or potentially de-regulation in the states that restrict legal funding activity. Regardless of what happens in the future, plaintiffs will benefit from legal funding services, and insurance companies will fight to determine those services.
