Lawsuit Loans – Arguments on Both Sides

I was having a conversation with one of the principles at Law Leaf the other day and we were once again discussing the lawsuit loan industry. The company first contacted this blog several years ago and after a discussion I thought it would be a good idea to devote a small section of our site to the industry. For those people that are unfamiliar with the term “lawsuit loan”, by definition it’s a non recourse advance against a lawsuit. Lawsuit loans have been around for more than a decade but I’m told very few people know they exist. I was one of those people a few years ago.

I must admit I still have some mixed opinions about the industry. I can relate to both sides of the argument and quite frankly I’m probably one of the few people that actually pay attention to the direction of the industry. The industry is rapidly growing. Over the last several years, I’ve spoken to several attorneys that have given up their law practice for a shot at the legal financing industry. I know one attorney that is now in the lawsuit loan industry that was actually against the practice of lending money against pending cases (go figure).

I have mixed opinions because I’ve heard both sides of the story more than once. I can relate to both sides of the story and surely understand why each side is taking such a hard position. I think we can admit it all comes down to money.

The insurance industry and the Chamber of Commerce argue the industry is creating frivolous lawsuits. They also believe the industry should abide by state usury laws (usury laws will allow a lender to collect on their investment up to a certain percentage).

Insurance companies are losing tens of millions each year because of the lawsuit loan industry. The insurance industry is a huge money maker and yes I’ve got stock in some of these companies. I believe while only a very small piece of the pie is being chipped away, the insurance industry sees the business of lending money to plaintiffs as lost revenues. Secondly I don’t believe for one second the industry is creating frivolous lawsuits. I don’t know one investor that would put their hard earned dollars into a frivolous investment. In fact the majority of all lawsuit loan companies in the United States only work with personal injury victims that already have attorneys. These companies will never lend money for legal fees and if they believe the person will lose the case, they won’t invest in it.

Companies like Law Leaf & Oasis argue the insurance industry is one of the main reasons why the industry exists. They believe if the insurance industry did a better job offering victims faster and more affordable settlements from the start, there would be very little need for legal financing. They also argue against usury laws because a lawsuit loan is non recourse, meaning there is no guarantee the investor will receive their investment back.

While the lawsuit loan industry isn’t making the type of profits the insurance industry is making, they seem to be doing well. I personally know insurance companies can be tough and yes some will force people into early settlements to protect their profits. However I do believe the Chamber of Commerce has a point regarding rates. I’m not 100% sure what the rates are on a single investment but I hear they can be high if the case lags on. If a lawsuit loan company is making an investment in a case, you better believe it’s a sound investment; I’m sure they are not taking long shots by any means. I am a capitalist through and through but I do believe there should be some limits on how much you can charge a person. Lawsuit funding companies argue that there is a shot that a case could be lost for a whole host of reasons, but quite honestly I question how many of these cases are actually lost each year.

My Opinion:

I have a network of colleagues and friends that represent a broad scope of industries here in the United States. I have a rather large network of folks that work in the legal industry and several good friends that work in the insurance industry. I’ve heard both sides of the argument over the past few years and this is what I’ve concluded.  A lawsuit loan is expensive but when push comes to shove, it can actually be a better option in comparison to settling a case too soon. On the flip side, if a person is holding out for a few thousand dollars and it’s between taking the settlement offer or borrowing against the case, take the offer.