Pre-settlement funding has seen its share of criticism over the years.  Opponents are quick to point out the business’ shortcomings to promote their various agendas.  This post will explore some common pre-settlement funding myths.

Pre-settlement Funding is for the Full Value of the Damages

One of the most common pre-settlement funding myths is the idea that lawsuit funding contracts are written for the entire amount of the settlement.  Opponents argue that settlement loans inhibit settlement negotiations because the repayment would leave little left for the plaintiff.  This argument would make sense if these transactions were for the full value of the damages.

 pre-settlement funding myths

pre-settlement funding myths

The reality however, is that lawsuit funding professionals go to great lengths to make sure this does not happen.  Understanding that settlement is in EVERYONE’s best interest, funding outfits limit the amount of money advanced against a lawsuit.  As a general rule, lawsuit loans are limited to 8%-12% of the subjective value of the case.  At today’s pre settlement funding rates, this leaves more than enough room for settlement.

To be fair, some pre-settlement funding transactions such as older advances, cases which encounter unforeseen difficulties, and/or if the case drags on longer than expected, can have repayment terms that would eat up a great deal of the case’s settlement value.  This is not by design however, since if a plaintiff does not settle, counsel must either try the case or remove himself from the attorney client relationship.  Neither of these is a desirable outcome for pre settlement loan companies.  Indeed, forcing a client to trial increases risk for the funding entity because anything can happen at trial.  Further, even if the plaintiff receives a favorable verdict, the case still must go through post trial motions and the appellate process thereby exposing the investment to even more risk.

Surely, there are instances of a repayment amount exceeding the offer, but these are the exception rather than the rule.  When it does occur, parties often negotiate a compromise.  Lawsuit funding companies, like all investors, operate by the old adage, “I am more interested in the return OF my capital than a return ON my capital”.  The pre-settlement funding myth that advances are made for full settlement value is simply incorrect.

Lawsuit Settlement Funding Companies Have a Say in How the Case is Handled

Another common of the pre-settlement funding myths is the idea lawsuit funding companies contact insurance adjusters directly to pester them or otherwise get updates on the status of a claim.  Pre-settlement funding usually involves personal injury cases, and while we cannot speak for every company in the business, we can unequivocally state that we have never heard of this type of communication happening – EVER.  In fact, and we have been in this business for many years, we cannot fathom why an adjuster take a call from an outside party such as a lawsuit funding outfit.

If this potential is really a concern, the fix is very easy to achieve – simply do not take the calls.  Making insurance companies out as victims is pretty crazy when you think about it.  The real victims of the litigation process are the plaintiffs who wait to be made whole while the claim/lawsuit drags on.

Pre-settlement Funding Encourages Litigation

This pre-settlement funding myth really fails the common sense test.  Lawsuit funding exists to level the uneven playing field between plaintiffs and deep pocketed insurance companies. How exactly this encourages litigation is not entirely clear.  Some might argue that since lawsuits require investments of time and money on behalf of attorneys and their clients, taking the money part of the equation might somehow allow access to the legal system for those who otherwise wouldn’t have the means.  In other words, because attorneys wouldn’t have to outlay capital for costs, expert fees and other expenses, they would be more inclined to pursue a case.

However, you would have a really hard time finding any attorney who is willing to waste his time on a losing case.  Lawyers have a finite amount of time from which to ply their trade.  Accordingly, they are very selective of the cases they take on.  In fact, the selective nature of an attorney’s practice is a primary screening to lawsuit funding.  Investing in lawsuits means investing in the experience and skill of an attorney.  That means that a case must be worthy before money is advanced.

In other words, money is not normally advanced for normal litigation expenses.  Lawsuit funding is meant for living and medical expenses.  If an attorney does not believe in the case enough to stake his/her own money and time on the file, then you will probably have difficulty in finding a lawsuit funding company willing to stake its money on the deal.  It is highly unlikely the presence of pre-settlement funding will create more lawsuits.

Many pre-settlement funding myths are designed to portray the lawsuit funding business as an evil enterprise designed to take advantage of people and whose presence negatively affects the legal world.  The settlement funding business is not sinister.  It is like any other business – filling a need that needs filling.  The fact that litigants use lawsuit funding is evidence the business is needed in the area of law in which it works – nothing more, nothing less.

Thank you for your interest in pre-settlement funding myths and the lawsuit funding business.