What is Litigation Finance, and How Can I Invest in It

As Percent strives to provide our investors offerings across a wide array of asset classes, we are excited to introduce the  latest addition to our platform: litigation finance.

In litigation finance, a third party provides contingent capital related to a legal case based upon a projected settlement value. In return, the third party may receive a portion of the financial recovery in the case or a rate of return on funds advanced. To further clarify, litigation refers to a case which is or may be proceeding through the traditional court process, and not through alternative dispute resolution such as Collaborative Law or Mediation. 

Most cases in litigation finance focus on personal injury pre-settlement funding. The scope of personal injury includes, but is not limited to, motor vehicle accidents (the most prevalent), premises liability, medical malpractice, and product liability. Litigation financing can serve as a pivotal bridge for plaintiffs who, without financing, may find themselves lacking the financial resources to adequately litigate a case for the fair settlement value. 

As an alternative asset class, litigation finance is well established, with numerous recent securitization transactions to note. One hallmark of the asset class is its cyclical resiliency, as individual case settlement values historically have low correlation to each other, as well as to the broader equity and debt markets.

 

Explanation of Common Case Types

The most common types of pre-settlement cases types are for car accidents and premises liability.:

Cases from car accidents generally involve a serious injury, where a claimant’s injury was caused by a collision of two cars, a car striking a fixed object, or a car hitting a pedestrian. The claimant may have been a passenger, driver or a pedestrian. Being able to demonstrate that the negligence of the party against whom the claim is brought was the primary cause of the injury is typically the chief matter in assessing the likelihood of settlement, with contributory negligence potentially reducing the amount of claims based on the laws in a given state.  

Premises liability claims typically include a claimant being seriously injured on someone else’s property due to some faulty condition existing there, such as injuries due to a wet or slippery sidewalk, being struck by a falling object, or being injured due to unsafe conditions such as lack of lighting in a high-crime area. These claims generally assert that a property owner is liable in these types of claims because the owner knew of the dangerous situation or should have known of it, but ignored it.

 

Life of a Case to Settlement

Maggy is driving on her way to work, abiding by the speed limit. John has just merged onto the highway, and his attention diverts from the road as he attempts to find his cellphone, and fails to see Maggy’s car slowing down ahead. In a matter of seconds, he rear-ends  her. Although both parties are alive, Maggy’s car is undriveable, and she has suffered minor bruises and a concussion. Maggy’s car is pivotal to her life as she needs it to commute to work. Unfortunately, she will be unable to work for a period of time due to her concussion, and is thus unable to provide for herself while she recovers. 

Maggy hires a personal injury attorney as she believes the driver at fault’s insurance company may not cover the damages she seeks. The attorney works for ABC law firm and, after assessing her case, believes that the final settlement value of the case will be $108,000, based on the details of the case and precedent settlements in surrounding jurisdictions.  

Given Maggy needs to cover a portion of her lost income and any case-related expenses while the settlement is ongoing, ABC law firm recommends Maggy seek an advance from XYZ Litigation Funding, a provider of third-party funding for pre-settlement cases, who ABC has recommended cases to in the past. After careful due diligence, XYZ decides to fund Maggy’s case for a total of $5,400.  (Note the amount funded by XYZ is not the full expected settlement value, but rather a small portion, with third-party funders typically maintaining low lien-to-value ratio (LTV), anywhere from 5-20%.)

Maggie will receive $5,400 on an expected $108,000 settlement value, representing a 5% LTV to the third-party funder.  Under the contract, a funding charge is applied to the funded amount based on the time elapsed to settlement of the case and repayment of the advance. Throughout the life of the case, the attorney and XYZ are in regular communication regarding any updates on the case that may impact the expected settlement value. Given the police report from the accident clearly indicates the other party was at fault, the time to settlement is expected to be on the faster side. For example, assuming the case settles within 6 to 12 months, Maggy will pay XYZ $7,830 for a $5,400 advance on a $108K case. This means Maggy still remains with over 92% of the settlement value, before covering any attorney’s fees. These may have been funds she would not have been able to obtain had she lacked the financial resources to retain an attorney or support herself while the settlement process was ongoing.

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We look forward to featuring investment opportunities in litigation finance in the coming weeks on the Percent platform. To be notified of new investment opportunities from Percent, sign up for an account today.

 

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