What is Reasonable Lawsuit Funding?
When we talk about reasonable lawsuit funding and what it costs, we are really discussing how lawsuit loans help plaintiffs meet their obligations in their time of need. After all, the truth of lawsuit loans is to support plaintiffs while their cases are litigated. Any discussion of reasonableness must weigh monetary costs with the utility lawsuit loans provide.
Considering the variety of uses for lawsuit loan cash and their widespread acceptance in the current legal landscape, lawsuit funding is meeting the needs of plaintiffs in spades. In this post, we discuss what we mean when we say “reasonable lawsuit funding” and how reasonableness plays into each applicant’s valuation process in every settlement funding contract.
Reasonableness is defined by Merriam-Webster as something that is fair, not excessive or extreme. Reasonable lawsuit funding can be defined the same way. Yet simply defining “reasonable” fails to get to the crux of the matter. This is because what may seem excessive, extreme or unfair is different for everyone.
Lawsuit loans cost more than car loans, mortgages, college tuition, etc. Does that make lawsuit loans unreasonable? Should we end the inquiry right there?
We think not because there are significant differences between loans and lawsuit loans. When car or home loans fail to perform, lenders can repossess or foreclose on the property which still has marketable value. Further, even after the property is repossessed/foreclosed, the lender can pursue the borrower personally for any shortfall.
Lawsuit loans are different in that they are non-recourse. This means the lawsuit must be the source of repayment. If there is no recovery, the lawsuit loan is not repaid. There is nothing to repossess but an unsuccessful claim. Indeed, a lawsuit loan loss is a total loss for the lawsuit lender. Lawsuit loan pricing must reflect this additional risk. Simply put, without the additional charges, as compared to other “loan” products, settlement funding loans would not exist in the marketplace.
Defining Reasonable Lawsuit Funding Through Criticism
Lawsuit funding is criticized by various groups. The practice met resistance from its inception almost 25 years ago. Interestingly, a large portion (if not all) of media coverage opposing lawsuit loans comes from those defending negligence claims. These opponents argue lawsuit funding fees are oppressive and want to regulate the practice to protect the public. These attacks seek to classify settlement loans as traditional loans and because the terms are more expensive than traditional loans, argue lawsuit funding terms violate established usury laws. We’ve already explained that lawsuit loans and traditional loans are very different transactions.
It should be further noted that 25 years ago, lawsuit loan pricing was very different. When the business was just beginning, investors (lawsuit funding enterprises) simply did not have enough historical data from which to develop accurate profit prediction models. They did not know how many losses would occur and how that would affect their businesses. Funders responded by pricing these vehicles with enough profit to account for these unknowns. This could simply be considered good business. Instead, opponents labelled the charges “outlandish and predatory” and questioned the lawsuit funding’s reasonableness.
The good news is that market forces drove down the price of lawsuit loan contracts considerably as companies sought to capture market share. Adding even more to the savings is that lawsuit funding companies will normally give their best pricing to clients who are referred by their attorneys. This makes sense since the company saves on the cost of origination – a line item with which ALL businesses must contend.
Pricing declines have certainly resulted in more reasonable lawsuit funding. However, we still haven’t adequately answered the question of what is reasonable.
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Reasonable Lawsuit Loans Best Definition
Consider a plaintiff who was involved in an accident and could no longer work. He filed suit against a tortfeasor and waited patiently for his case to progress. Over two years pass and the case finally makes it on the trial calendar. Unfortunately, years of waiting took its toll on his finances. Facing foreclosure on his home, he reached out to the best lawsuit funding company he could find to explore his options.
He was months behind and needed $20,000 to get current and avoid foreclosure. His case had an estimated settlement value well over $1,000,000. But the current offer was only $500,000. Liability was clear, damages severe and permanent, and ample coverage existed to cover the loss. Because of his financial situation, he was tempted to accept the offer even though it was far less than what he deserved.
The million dollar settlement estimate gave the funding company plenty of room to give plaintiff what he needed. With the $20,000, the plaintiff refused the offer and got current with his finances. When examining reasonableness, wouldn’t it be proper to do so in light of the plaintiff’s situation?
Consider further that this story had a happy ending. His attorneys were able to negotiate a million dollar settlement. The reasonableness calculation then must weigh the cost for the $20,000 against the $500,000 gain. The lawsuit loan might have cost him an extra $10,000 bringing his total cost to $30,000. His gain was $470,000 because he used a lawsuit loan ($500.000 – $30,000 lawsuit loan cost = $470,000). Is that “reasonable lawsuit funding”? Most would respond with an emphatic “YES” to that question.
Reasonable Lawsuit Funding Takeaways
Obviously, all cases are not the same. And some clients do treat their cases as if they are Automatic Teller Machine’s (ATM’s). Lawsuit funding companies are happy to oblige.
The point however, is that when discussing reasonable lawsuit funding, we shouldn’t do so by comparing the cost to different financial transactions which share the name “loan”. We shouldn’t define reasonableness in the abstract because there is simply no objective way to gauge reasonableness.
The issue is subjective by nature since everyone’s circumstances are different. And plaintiffs are in the best position to understand what challenges they face and what is the appropriate response. They should be the ones to decide what is reasonable. It is as simple as that.
Thank you for your interest in reasonable lawsuit funding.