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The 4 Primary Elements of All Legal and Medical Funding Applications

March 21, 2018
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7min read

When approaching a new problem, one tactic is to break it down into first principles, the fundamental truths of a problem. Sure seems to be working for Elon Musk...

When assessing legal and medical funding investments, the first principles you need to keep front and center all the way from intake and through servicing are the 4 primary elements of personal injury law. Now, not everybody on your teams needs the expertise of an attorney or underwriter, but it’s imperative that they do understand the basic underlying terms and legal and financial principles at work, and that’s where we step in.

This information is useful for both onboarding new team members, and if you are already a pro, as a refresher that you can keep front-and-center when working. It may also help you understand and determine the most appropriate criteria for your company, and allow you to focus your team's’ energy on those case that fit into your investment theses.

This post breaks down for you the 4 primary factors of a case:

  1. Liability
  2. Damages
  3. Collectability
  4. Liens

Liability

What is it?

Liability, or the legal responsibility for one's acts or omissions, is one of the most significant terms in the field of law. The failure of a person or entity to meet that responsibility leaves them open to a lawsuit. To win a lawsuit, the suing party (plaintiff) must prove the legal liability of the defendant.

Causation, a closely related legal concept, provides a means of connecting conduct with a resulting effect.

  1. In order to prove a claim, a specific act/the tort, must be the “cause-in-fact” or (actually result in) the plaintiff’s injury. Courts strive to determine whether the plaintiff’s injury would have occurred “but for” the defendant’s conduct.
  2. Sometimes, where causation is one component of a tort (e.g. negligence claims), causation is just one part of a multi-stage test for legal liability. In other claims (e.g. products liability), causation is the only requirement for legal liability.

Why important for you?

Liability is considered by many legal funders as the main qualifier for a given application — a plaintiff’s case needs to carry some evidence that the defendant is indeed liable.

As you know, determining liability in many, if not most, cases can be challenging for your underwriters and take months in court, but once and while it may be straightforward in some cases. When you have a lead where the incident in question was the obviously the defendant’s fault, then it’s not a matter of whether or not the plaintiff will win their case, but how much will they win (a.k.a. damages) and when.

To get a sense of liability, most companies seek from attorneys:

  1. Police reports
  2. Expert’s reports
  3. Photos
  4. Witness statements/depositions
  5. Initial treatment records

Damages

What is it?

Damages, or the amount of money which a plaintiff may be awarded in a lawsuit, is synonymous with value. To medical funders and legal funders, this figure helps determine how much money they may be willing to invest in a given case -- the damages represent the upper limit for what a case could be worth.

Why important for you?

There is a direct correlation between the amount and extent of medical treatment and other damages a plaintiff’s case can reasonably claim and the value of the case.

To determine the potential damages, most companies gather:

  1. Medical bills (dollar amounts)
  2. Treatment records (number and type of treatments)
  3. Diagnostics (e.g. physicians narrative report)

Collectability

What is it?

This refers to a plaintiff’s ability to collect a settlement if they win the suit and is often dependent on the defendant’s insurance coverage (and sometimes on the plaintiff’s insurance as well, as some states determine collectability from each party’s insurance).

Why important for you?

Foremost, collectability determines the upper-limit on a plaintiff’s settlement. As we previously discussed in Your Guide to Underwriting MVAs, not understanding what sorts of policies are available, or how many people are making claims against them, is one of the most common and dangerous mistakes 

made by funders and underwriters

In order to get this piece of the puzzle, be sure to get info on:

  1. State minimums
  2. Defendant’s insurance policy + umbrella policies
  3. Plaintiff’s insurance policy (UIM)

Prior Liens

What is it?

With a tip of the hat to Investopedia, “A lien is a legal right granted by the owner of property, by a law or otherwise acquired by a creditor. A lien serves to guarantee an underlying obligation, such as the repayment of a loan.”

In the legal and medical funding industries, liens come in many forms, such as (i) prior legal fundings, (ii) letters of protection, (iii) child support, and (iv) medical liens, just to name a few.

Why important for you?

They almost always directly reduce the potential value of the case, and they can affect the priority order in which you may get paid. As such, the existence of any of these can disqualify a case if the value of the prior lien exceeds the current projected value of the case.

How to determine prior liens:

  1. Prior legal funding: ALFA and ARC both maintain databases
  2. Governmental: some funders use background search tools like CLEAR
  3. Legal/Medical: ask the attorney or paralegal on the case

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