Insurance Loan Sharks
A few weeks ago, my car was in the shop, so I took an Uber to go pick it up. On the way there, my Uber driver started the usual small talk when we got to the “so what do you do for work” category.
What followed was an unprompted 30 minute TED talk about insurance, which eventually led to the topic of litigation funding.
This is the sort of experience ALL of my Uber drivers have, by the way. If you follow me on socials, you get to hear me talk about risk and insurance for 120 seconds. If you pick me up in an Uber, you get to hear me nonstop for the entirety of the car ride.
After I wrapped up my litigation funding lecture, he said “Wow! How is that legal?” Which means a) he was actually listening to me (yay!) and b) I explained litigation funding in a way that made sense to someone unfamiliar with the concept.
And now, you get to benefit from that same lesson (minus the Uber ride).
Think of a loan shark.
Loan sharks lend you money at exorbitant interest rates, outside of legal and regulated channels. And if you don’t pay up, some dude named Paulie is coming to break your knee caps.
Litigation funding is similar, but it takes a couple of different forms:
The first is pre litigation funding primarily aimed at the plaintiff and involves an agreement between the plaintiff and the funding company (ahem, loan shark). Let’s say plaintiff was terminated and filed a wrongful termination suit. While waiting for discovery to be completed, plaintiff needs money. Plaintiff applies for a loan and the litigation funding company provides funds with predatorily high interest rates. Plaintiff only needs to pay the loan back IF there is a settlement or judgement, but the interest rate is very, very, VERY high (financial equivalent of broken knee caps).
In case you need help picturing Paulie, here’s my favorite Paulie from The Sopranos.
The second form is investment litigation funding, and this is a completely different animal. This form of litigation funding is aimed at the plaintiff’s attorney and typically involves them offering their entire case portfolio as collateral against the “loan”. When it comes to investment litigation funding, Paulie doesn’t just break knee caps…he amputates.
Both forms are unregulated, and the loans are “non recourse” loans.
Meaning…
There is no recourse for neither the plaintiff attorney nor the plaintiff against the litigation funding company for disputes regarding the terms of the loan, the interest or fees charged and associated with repayment. Interest related to repayment is typically well over 100%.
Some litigation funders also include a suite of services that include referrals for expert witnesses and medical legal professionals. Since there is currently no regulation on this industry we have no way of knowing how much if any money is routed to litigation funders through each referral or if they have financial interests in the expert witness and medical legal professionals that they are referring attorneys too.
It also is unclear where exactly this money is coming from.
The rate of investment return on litigation funding appears to be particularly high. As a result, investments could be made by private corporations and hedge funds. But due to lack of regulation, investments can also be made by illegal entities (Like Paulie!) and there is no requirement for disclosure of sources.
Since plaintiff attorneys may have their entire case portfolio on the line, they are pouring huge sums from that loan into the litigation of the case against the defense. This is contributing to some of the massive verdicts we are seeing across the U.S., and one of the issues driving liability market conditions.
There is definitely more to this story, but this is a blog, and I need to keep it short or else Paulie might come for MY kneecaps.
