Understanding Litigation Finance Underwriting, Part II

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 second of two posts on the underwriting process and how it implicates the way in which funders work with lawyers. The previous post focused on underwriting from the funder’s perspective, while this one considers the underwriting process from the perspective of the funded claimholder.

As noted in the previous post, the underwriting process always involves a review of the case by independent lawyers, either those who are in-house at the funding company, or outside counsel hired by the funder. Of course, these reviewing attorneys consult with the lawyers who represent the claimholder in the case.

Attorneys who have been involved in funded cases note that the funders’ attorneys often offer helpful insight into the cases under consideration. As one attorney has pointed out, underwriting is “a great opportunity for a law firm to learn more about its case.”

Determining the precise terms of the investment is an important adjunct to the underwriting process. Neither the funder nor the claimholder will want to go through with an investment that comes with conditions or qualifications that they find problematic. In this connection, it is always important that funders and the investment agreement make it clear that the funders will not have any right to exert any control over the litigation process.

Indeed, this is why underwriting is so important. To the extent that the funder has any “control” over the litigation, that control comes when the funder is deciding to invest in the case. Because the funder cannot dictate – or even participate in – tactical or settlement decisions, the funder must be able to feel comfortable with the direction of the case before it even gets involved. For this reason, it is advantageous to the claimholder that the funder engage in a careful and deliberative underwriting process. Once the funder is reassured by sound underwriting, it will be a better partner in the case as it goes forward.

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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