Regulating consumer legal funding, especially for personal injury plaintiffs, has become a hot topic across many states. With the increasing demand for plaintiff financing, regulatory scrutiny has also intensified. Policymakers face the challenge of regulating this innovative financial product, and here’s why it’s a complex issue:
- Initial Bias Against the Industry: Many lawmakers have an instinctive hesitation about an industry that “finances lawsuits.” This can place the funding industry at a disadvantage from the outset.
- Confusion Over Its Nature: Although the pricing model of legal funding may resemble a loan, courts and regulators have consistently ruled it is not.
- Insurance Industry Pushback: The legal funding industry faces strong opposition from large insurance companies, which see legal funding as a threat because it gives plaintiffs more time and financial flexibility to wait for fair settlements.
- Complexity of the Product: Legal funding is difficult to fully grasp. Unlike most financial products, legal funding involves consumers who are all represented by legal counsel.
To assist policymakers in making informed decisions, here are ten key points to consider when addressing the regulation of consumer legal funding:
1. Why Do People File Personal Injury Lawsuits?
Personal injuries can be financially devastating, leading to lost wages and overwhelming expenses. Filing a lawsuit is often the best — and sometimes the only — way for victims to seek justice and compensation.
2. Why Do People Seek Legal Funding?
Most Americans struggle to cover emergency expenses of $500 or more source. For plaintiffs, legal funding helps cover essential living expenses — rent, groceries, medical bills — while waiting for their cases to settle. This allows them to avoid settling prematurely for a low-ball offer.
3. Why Not Settle Cases Immediately?
Many plaintiffs face off against large insurance companies, which can prolong legal proceedings for years. This forces plaintiffs to consider settling early to cover their bills. Legal funding provides an alternative, enabling plaintiffs to receive a cash advance on part of their claim, allowing them to wait for a better settlement offer.
4. Who Opposes Legal Funding?
It’s no surprise that insurance companies oppose legal funding. Without it, plaintiffs would have no choice but to settle their entire claim with the insurance company, often for far less than it’s worth. Legal funding introduces competition and options, just as Uber did for taxis and Airbnb did for hotels.
5. How Much Does Legal Funding Cost?
While the cost of legal funding can lead to repayment amounts that are double or triple the original advance, the typical advance is usually under $5,000. This is often far less than the amount a plaintiff would forfeit by accepting a lower settlement offer.
6. Is Legal Funding Comparable to a Loan?
No. Legal funding is more like an investment. If the case wins, the legal funder receives a return. If the case loses, the funder gets nothing. The risk is higher for funders compared to lenders, and that’s why the return rates may appear higher than loans.
7. Do Third-Party Funders Influence Legal Proceedings?
No. Funders are legally prohibited from influencing legal strategy. On the other hand, insurance companies, which defend the opposing side, are heavily involved in legal strategies. In fact, a hundred and fifty years ago, the public was skeptical of liability insurance, believing that it incentivized people to act more recklessly and distorted settlement offers. Legal funding provides plaintiffs with the financial flexibility to stand their ground against such well-funded opponents source.
8. Will Legal Funding Encourage Frivolous Lawsuits?
No. Legal funders only invest in cases they believe have merit because they lose their investment if the case doesn’t recover source. Moreover, legal funding helps counter frivolous defenses, which some defendants use to delay legitimate claims and force plaintiffs to settle.
9. Are Legal Funding Consumers Being Exploited?
Not at all. Legal funding consumers are always represented by an attorney who ensures they understand the terms of the funding agreement. Many of the calls for strict regulation are fueled by the insurance industry, which would benefit from limiting plaintiff funding options source.
10. How Should the Government Respond?
Regulation is necessary, but it must be approached thoughtfully. We advocate for regulation based on the following principles:
- Permission, Not Prohibition: Allow new business models to emerge.
- Transparency and Disclosure: Ensure consumers understand the terms and allow market competition to drive rates down.
- Level Playing Field: Don’t give traditional insurers an unfair advantage over new entrants in the market.
- Regulatory Clarity: Provide a regulatory framework that allows for innovation without excessive burden.
For more insights into this issue, check out Justice Bolt’s discussion on the topic.
By following these principles, policymakers can regulate this growing industry effectively while still protecting consumers and encouraging fair competition.
