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Plaintiff Finance

10 Things Policymakers Should Know About Consumer Legal Funding

September 12, 2015
4min read

Legal funding has been gaining wide acceptance around the world.  But some of the rules and laws are still catching up, and no type of legal funding has received more attention than consumer legal funding.

There may be two reasons for this: first, consumer transactions always receive more scrutiny, as it’s important that consumers are protected.  Secondly, the groups that are most negatively affected by consumer legal funding are clearly defined, well organized, well financed, and they are pushing the issue.  We refer, of course, to insurance companies and Big Business, who make up a huge percentage of the defendants in consumer cases.

The consumer legal funding debate is an important one, rife with misinformation and propaganda. The following is a brief rundown of what we think policymakers ought to know.

1. Plaintiffs Need More Options

Many accident victims don’t have the luxury of working while they heal. What should they do? Before legal funding, they usually had one choice: accept a low-ball settlement from insurance companies. But legal funding has helped millions of plaintiffs remain patient while they await a fairer offer.

The average advance is less than $5,000. This isn’t much, but it’s often enough––to prevent eviction, to put food on the table, to buy medicine and pay the bills.

2. Legal Funding is Not a Loan

Whereas loans can spiral out of control, ruining lives, legal funding is non-recourse: plaintiffs who lose their cases owe nothing to the funder. Plaintiffs who win, meanwhile, never owe more than they receive; in most cases, they owe only a fraction.

Yes, it costs more than a loan, and it should: borrowers must pay back a loan no matter what. This is dangerous, and has sent too many into inescapable debt spirals.

3. Legal Funding Often Pays More Than It Costs

No one’s claiming legal funding is inexpensive; there are good reasons it’s not.  But not everything expensive is a bad deal. In many cases legal funding pays more than it costs, by allowing people to wait for a fair settlement.

Here’s an animated video to show what we mean.

4. As The Market Grows, Rates Will Shrink

The industry is still in its infancy, still maturing, and as more competition emerges, rates will continue to decline. Unless, of course, more barriers are constructed.  We should think of ways to facilitate this maturation, not hinder it.

5. Funders Invest In Worthy Cases

You have probably heard the argument that legal funding will backlog the judicial system with frivolous litigation. This argument is worse than asinine––it is simply illogical, and contradicted by this pivotal study in the 2013 University of Pennsylvania Journal of Business Law.

It is in the interest of legal funders, who lose their investment if a case doesn’t recover any money, to only invest in what they believe to be meritorious cases. As Joanna Shepherd and Judd E. Stone note in their May 2014 paper Economic Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance: “Frivolous litigation makes for a worthless investment.”

6. Consumers of Legal Funding Are Different Than Other Consumers

…because they are almost always represented by attorneys when they enter the legal funding transaction. Those attorneys help to explain what legal funding is, and guide their clients through the crucial decision: whether to settle early, or take legal funding and wait out the lawsuit.

7. There’s One Easy Way To Make Legal Funding Obsolete

In general, neither insurance companies nor large corporate defendants are subject to strict penalties for waiting to make fair settlement offers––even on clear-cut cases. Any policy that compels insurance companies to make early good faith offers––or face severe penalties––would significantly reduce consumer dependence on legal funding. Alas, insurance companies have already won this battle, and in most states reign freely at the expense of consumers.  This, ironically, is what spurred the invention of legal funding as a free market solution.

8. Insurance Companies Want To Get Rid Of Legal Funding

…and are financing the effort to regulate it out of existence. This should tell us all we need to know.

9. Regulation Can Helps Consumers, But It Can Also Hurts Them

The devil’s in the details. In Ohio, regulation has largely given consumers protection without limiting their options. In Tennessee, regulations claiming to protect consumers have driven out every legal funder. Tennessee residents who need money while waiting for a fair settlement have one option: take whatever the insurance companies offer.

10. Legal Funding is Already Widely Accepted

You just might not recognize it. For one, subrogation clauses give insurance companies the power to fund and conduct litigation on behalf of the policyholder. The insurer advances a fraction of the recovery, directs the lawsuit, and assumes the entire reimbursement. More familiar than this is the widespread practice of attorneys operating on contingency: that is, paying for litigation in return for a portion of the recovery.  And don’t forget about commercial legal funding – this thriving and highly regarded industry is identical in almost all respects to consumer legal funding.

Photo credit: Matt H. Wade, CC-BY-SA-3.0

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