Understanding Litigation Finance Underwriting, Part I

Understanding how litigation finance works requires an understanding of the process by which a prospective funder evaluates and chooses the cases in which to invest. Underwriting is what assures that litigation finance is an economically rational undertaking, not merely a bet on the outcome of a lawsuit. This is the first of two posts on the underwriting process and how it implicates the way in which funders work with lawyers. This post focuses on underwriting from the funder’s perspective, while the next post considers the underwriting process from the perspective of the funded claimholder.

There are three principal considerations in the underwriting process: the merits of the claim, the identity of the claim holder/client, and the identity of the counsel handling the case. Among these the merits are obviously the most important, and they pertain to factors such as the type and strength of the claims, the nature of the evidence, the amount likely to be recovered, and the probability that the defendant can actually pay a settlement or judgment.

The identities of the claimholder and its counsel are important because, given that funders don’t make tactical or settlement decisions, the funder has to be confident that their skill and judgment will lead to a successful outcome. In this connection, funders often look for claimholders who do not have an excessively emotional stake in the outcome of the case. Funders like to work with claimholders who are willing to settle and who are not determined to fight the case as a means of satisfying some emotional need. Moreover, funders often prefer to work with claimholders who intend to put the invested funds directly into the litigation, which assures that, like the funder, the claimholder has a “skin in the game.”

To evaluate these considerations, funders rely on experienced litigators. These independent lawyers review the case itself, as well as the claimholder and its counsel. Some funding companies rely only on their own in-house lawyers to conduct these evaluations, often believing that keeping things in house assures consistency in the evaluative standards. Other firms rely primarily on their own lawyers but also consult with outside counsel.

It is hard to find cases that score highly on all of these considerations. The largest funding companies typically select between 5 and 10 percent of the opportunities presented to them. And when a funder does decide to invest, the amount of the investment is often limited. Typically, funders offer claimholders about 10 percent of the expected recovery, although that percentage may vary depending upon the size of the litigation budget for the case.

Keywords: litigation finance, third-party litigation funding, underwriting, law firms

Work Cited:  David Lat, A Peek Inside the Pipeline: How a Litigation Finance Deal Comes Together, Above the Law (Sept. 21, 2018) available at https://abovethelaw.com/2018/09/a-peek-inside-the-pipeline-how-a-litigation-finance-deal-comes-together/

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