When people are involved in litigation, legal and personal expenses become increasingly expensive, especially when they are up against insurance companies and giant corporations. With the decreasing value insurance companies offer as a settlement, many people, specifically those who are injured, discriminated against, or have been wrongfully imprisoned, turn to legal funding as a viable alternative to take care of their current urgent expenses while they get access to justice.
Daniel Digiaimo, CEO of Baker Street Funding, said on Entrepreneur Magazine, “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.”
What Is Legal Funding?
Legal funding is a form of non-recourse financing which enables plaintiffs to get financial assistance during litigation. Unlike traditional loans, legal funding is not to be treated like a loan because it is non-recourse.
Bank loans require borrowers to have good credit, employment and generally, borrowers must pay back the loan on a monthly basis. Otherwise, creditors will trash their credit, harass them and even sue them, many times driving non-paying borrowers to bankruptcy.
However, legal funding does not require borrowers to have a job or good credit, and they are not required to pay back the advance unless they win their case. In other words, in the event that a case fails a settlement or verdict, the legal funding company loses its investment in full because the borrower can legally default on the loan. The borrower is 100% exempt from paying back the funds. That is the main difference between bank loans and legal funding.
There are two main types of legal funding: pre-settlement funding and after the event (ATE) insurance, post-settlement funding.
Plaintiffs who have suffered injuries tend to also suffer financial loss due to being injured in an accident through no fault of their own, for example, at work or in a road traffic accident. These people use pre-settlement funding to pay their daily living expenses before their case settles, as it helps them get by.
Legal funding can also be provided for attorneys in the pre or post-settlement stage of a case. They typically use it to get capital for legal costs, disbursements, and other legal matters.
Ethical Concerns
Legal funding is a relatively new concept in the legal and finance profession. With little regulation, it can be a minefield for injured penniless victims needing financial assistance while they pursue justice. But also, it could be an open door for predatory firms.
In particular, legal funding companies often have terms and conditions which allow them to withdraw their financial support if they see that a case is no longer fit for financing due to the high risks in the investment.
Because funding litigation is done on a non-recourse basis, it carries an extreme risk to legal funding companies. They often avoid financing cases where the advance exceeds 10% of what a claim is worth, and the rates are typically higher than bank loans.
The best financiers charge rates that are a bit higher than personal loans but much lower than payday loans.
While legal funding is extremely risky to lenders, it should never be predatory. So, where do you draw the line? Legitimate companies’ charge rates that go up to 42.5% APR, to make up for the investment loss when potential legal cases don’t settle.
Some individuals would argue that the legal funding charge should be no more than 10% APR because they are loans, completely ignoring the high risks of the non-recourse investment.
In this scenario, many victims would never be able to seek justice against corporate giants if legal financing was placed in the category of loans because it would push funding companies to withdraw from that particular state’s law that dictates that legal funding works like a loan, giving the upper hand to insurance companies leading people to settle for less.
Oliver Maurice from Syz Capital, an investor in litigation funding, commented, “We’re financing David against Goliath.” David being injured victims seeking justice and Goliath being wealthy corporations.
Basic Criteria to Qualify for Legal Funding:
Legal funding only covers legal costs for attorneys, particularly those cases related to disbursements such as court fees or expert witness reports, which are essential for the case. Plaintiffs cannot get financing for legal matters, only for their own personal expenses.
You have a good chance of being awarded legal funding if you meet the following criteria:
- Your case has to have merits.
- The amount you request must be no more than 10% of your present settlement value. These amounts vary depending on your case and the legal funding company.
- You must have suffered injury or loss due to an accident or negligence that has caused you to incur legal costs.
- If any complex issues are involved in your legal proceedings, these should be resolved before legal funding is considered.
- Your attorney has to be present and consenting at all times.
The legal funding company will also consider other important things:
Your Damages: Although legal funding companies are willing to provide financial assistance to anyone with a strong case, if your damages are relatively low, the legal funding company may not be able to find enough funds in your case to meet the advance. For example, legal funding companies will generally not be prepared to fund any legal action which has a total value of less than $10,000.
Sufficient Margin for Investment: Legal funding companies will not fund a legal action where the original sum they advance exceeds 10% of the anticipated settlement, regardless of how much or little you have suffered by way of damages. This is because legal funding is intended as a short-term legal finance option and the risks of the investment are tremendous for investors.
An attorney’s cooperation: Legal funding companies are often reluctant to invest in cases where the attorney or legal representative does not cooperate with their finance team. This can be an important factor, particularly in personal injury cases.
