The Lawsuit Funding Process
In understanding and dealing with legal funding, it is important to recognize the parties involved in the field. The key players in the mechanism and process of legal funding are the clients, the brokers, the underwriters and the lawyers. These key players and their attendant roles in the legal funding mix will be addressed from the vantage of personal injury legal funding.
The client often referred to as the recipient or beneficiary is at once, arguably, the most critical building block in the legal funding industry. One might ask: Why? Since without them there would be nothing. These clients are those plaintiffs that are involved in personal injury claims with sufficient merit that require money either to help with the costs of litigation or to help with day-to-day living expenses or to pay medical bills while their case pends. Unlike traditional loans, legal funding does not require the client to have a job, collateral or good credit.
More and more, legal funding brokers are playing an integral part in the legal funding space. Their role is to originate lawsuit loans for legal finance companies. In fact, most of the TV spots and the websites that you see online advertising for legal funding is typically legal funding brokers. These brokers are tasked with generating leads and, in turn, referring those qualified leads to the underwriter. The brokers value-added is immediately felt as brokers who provide immediate access to the legal funding market have considerable expertise within the space and thereby can most likely connect the proper client with the proper underwriter thereby minimizing transaction costs.
The underwriters or liquidity providers are those legal funding companies or investors that are willing to advance immediate money to plaintiffs with personal injury claims that possess sufficient merit in exchange for the right to a portion of the future proceeds of a settlement or award. The money that is provided to the plaintiff can be used to pay for day-to-day living expenses, medical costs or to help with litigation costs while the case pends.
The whole mechanism and process of legal funding, however, hinges on the attorney and their cooperation. What is required from the attorney is twofold: first, they have to provide the requested documents to the underwriter, in order to evaluate whether the case has sufficient merits to satisfy their respective risk models; and, secondly, ultimately, if approved, the attorney will need to sign the contract acknowledging placement of a lien on the case and agree to perform the duty of escrow agent in order for that client to fund.
Now that we have addressed the participants in the “black box” of legal funding, let’s turn our attention back towards the actual steps in the process.
The typical process for personal injury legal funding follows the model of Sourcing, Selection, Underwriting and Funding.
Servicers or what I called ‘liquidity providers’ of personal injury legal funding contracts rely on attorney referrals, brokers and their marketing to originate deals.
Their marketing efforts and attorney referrals are an important source of deal origination for the servicer/ provider. However, more and more, brokers have become an important part of the origination landscape. Why? Because it is simply easier for the legal funding company (servicer/ provider) to not waste its time and money on in-house marketing efforts when a broker can simply so this for you.
OK, are you still with me? Phone, email or website often initiates the typical personal injury lawsuit funding investment process. In the normal course, an agent will contact the prospective applicant and further qualify if pre-qualification criteria are met. Remember, they have to be from a state where legal funding is available, they have to have an attorney on a contingency basis, they have to have a viable legal claim against a defendant who can pay (i.e. insurance).
Once everything is met, the agent will normally move forward and request the case records for the plaintiff from the attorney with the consent of the plaintiff, of course. The plaintiff must provide authorization for the attorney to give the case records to the provider.
Usually, the underwriter will start by reviewing all the documentation associated with the case and will speak with the plaintiff’s attorney to address any issues or concerns they may have.
They will consider all the information they collected including damages, liability, defendant’s ability to pay, plaintiff’s background and whether there is sufficient margin for investment.
Finally, the underwriters will arrive at a decision. They will either deny, approve or postpone a decision subject to further information/ documentation.
If it is approved, a contract will be sent for execution by the attorney and plaintiff and the funds will be sent out to the plaintiff.