In our last article, we spoke in detail about the pre settlement loan business as it relates to managing investor’s money. We discussed how money management strategies can help minimize losses for the enterprise. In this post, we will discuss an important cause of underwriting losses. Later we will discuss how pre settlement loan companies most effectively deal with this issue.
The goal of any business is to make a profit. The lawsuit loan business certainly shares this objective. It is fair to say if an enterprise has remained in business for a substantial period of time, a profit is being made. Otherwise, why would business people continue?
It follows then, once a business is viable (making money), the business seeks to maximize profit. In the pre settlement loan industry, the most effective way of increasing profit is minimizing losses.
Since every pre-settlement loan is offered as “non-recourse” funding, the advance does not have to be repaid if the lawsuit is unsuccessful. Usually, every loss is a TOTAL loss for the pre settlement loan company.
Pre Settlement Loan and Limited Information
Although there are any number of reasons why a lawsuit may lose, for pre settlement loan enterprises, the vast majority of underwriting losses can be traced to the fact that lawsuit funding relies on limited information.
Since lawsuits are advanced money all over the country, each case contains a plethora of variables. An unforeseen twist in any of these variables could have a catastrophic effect on ultimate resolution of the file.
These variables include:
- Choice of Law
- Inconsistent witness testimony
- Untruthful clients
- Untruthful lawyers
- Omissions of material facts
- Prior pre settlement loans
- and a host of others. . .
One Common Example
Let us take an example of a plaintiff who was injured in an automobile accident. Clearly, the extent of the plaintiff’s injuries has a great impact on the value of the case. If the plaintiff previously injured the same body part prior to the accident in question, this fact would likely reduce the case’s settlement value. Unfortunately, people sometimes are less than forthcoming with this information both to lawyers and funding companies. And although pre settlement loan enterprises are diligent in compiling pertinent information, omissions such as pre-existing conditions are sometimes left out of the analysis. In some instances, this situation can be harmless and the settlement loan company will receive its return. In others however, a large reduction in settlement value can mean a total loss.
Unfortunately, limited information is a landmine in any investing endeavor. Pre settlement loan companies (underwriters, sales staff, etc.) seek to maximize the amount of information available while considering the needs of all the parties involved (clients, attorneys, investors). And while an omissions like discussed above are not the norm, they are an example of why accurate information is an important factor in the lawsuit funding process.
Of course, some lawsuits simply lose. However, a large portion of pre settlement loan losses can be traced to the inability to foresee (for whatever reason) the ultimate cause of the lawsuit’s failure.
In future posts, we will discuss how pre settlement loan enterprises respond with various pricing structures.
Thank you for your interest in the lawsuit funding business.