The Risks That Justify The Costs of Consumer Legal Funding

Research shows that the costs of Cartiga’s consumer legal funding are outweighed by the significant funding benefits and that those costs are reasonable compared to alternative sources of money. Nevertheless, some ask whether the costs of funding are justified by the risks assumed by Cartiga. This article explains why the costs are well-justified.

The Risk of Loss

The costs of legal funding are justified in part by the “risk of loss” assumed by Cartiga; that is, the risk that claimants will lose their lawsuit or otherwise not recover on their legal claim..¹ If that risk occurs, and there is no recovery, Cartiga loses all the funding money it has provided to the claimants (plus any return on that money) because consumer funding is “non-recourse.”.² The claimants keep their funding, and Cartiga gets nothing in return.

This risk of loss is significant and is attributable to several variables singular to legal funding that include:

• Whether claimants will prevail and the ultimate value of the case, is inherently uncertain at the time a case is funded. ³ Despite common misconceptions, lawsuits are not a sure thing: “On average, victims do not recover even their hard costs—their out-of-pocket expenses and lost wages—let alone recompense for their pain and suffering [or] diminished enjoyment of life….” ⁴
• The uncertainty about the outcome and the value results in part from the incomplete information that often exists about liability and the extent of damages at the beginning of the case. ⁵ Thus, the likelihood of recovery and the range of potential outcomes can fluctuate throughout the case if the known facts and circumstances change during discovery. ⁶
• Cartiga is dependent on the outcome of cases for payment, but it possesses no control over the prosecution of those cases or their settlement. ⁷ The outcome instead can fluctuate and be affected by the conduct and intentions of multiple parties (the plaintiff, the defendant, their respective counsel, the insurance company, the judge and potentially the jury in the case). ⁸

This significant risk of loss of the funded amount, the expected return, and the numerous variables affecting that risk make consumer legal funding a riskier investment than many debt or equity transactions. ⁹ Even more difficult than credit cards and subprime mortgages.¹⁰As a result of those risks, this funding “typically demands higher returns” than those other transactions. ¹¹

Indeed, at least one commentator has observed that the transfer of risks to a funding company is similar to offering high-priced insurance. From that perspective, funding is a business where a “plaintiff accepts a fixed gain today in return for giving a funder a share of a gamble that may or may not pay off.” ¹² The amount of funding provided is a proxy for some of the risk that a funder incurs, and the amount of money recovered is a proxy for the value a funder has added. ¹³

The Duration Risk

The cost of legal funding is also justified by the duration risk that Cartiga assumes: the risk that cases will take longer to resolve than expected. ¹⁴  The time needed to obtain a recovery is a proxy for some of the risk that Cartiga assumes. ¹⁵  That risk has increased in recent years as COVID has extended the average duration for single-event personal injury cases by many months, if not years. ¹⁶

This duration risk is compounded by the fact that Cartiga does not receive any repayment during the pendency of the case; it must wait until the end of the case to get any payment. In the words of one article, “[t]he lack of interim payments during the pendency of the plaintiff’s claims … increases the risk that the funding company will not see a profitable return on its investment.” ¹⁷

As a result of the timing risks, Cartiga may not only have to wait longer than expected to recover the amount funded and any return, but Cartiga may have to go further “out of pocket” to pay the internal costs of its business because it has no revenue from cases delayed. Due to this duration risk and the unpredictability of litigation, “funding companies cannot finance lawsuits at traditional consumer loan rates” ¹⁸ and can “justify higher interest rates than those allowed for traditional consumer loans.” ¹⁹

The Cost of Money Risk

Finally, the cost of legal funding is justified by the risk of accelerating interest rates in the overall market.  Cartiga borrows money to provide funding and then incurs the cost of that money while the funding is outstanding for the extended durations discussed above.  The cost of that money has risen dramatically in recent years. Since 2022, the Federal Reserve has raised interest rates more than 11 times for a total of more than 5%, ²⁰ causing the cost of money for funding companies to skyrocket as well. Because funding companies “trade the time value of money” (as well as the risk of loss) in exchange for a return, ²¹ funding companies’ returns must reflect that increase in the cost of money in addition to the risk that the cost of money will continue to rise in the future while the funding is outstanding.

Conclusion

Legal and economic scholars agree that the benefits of Cartiga’s consumer legal funding are highly compelling for consumers ²² and lead to higher recoveries in their cases. ²³ Those benefits include the transfer of litigation and other risks away from consumers to the funding company like Cartiga. These risks assumed by Cartiga more than justify the cost of its funding that maximizes outcomes for lawyers and their clients.

This article is for marketing purposes only, does not constitute legal advice, and should not be relied upon as legal advice.

1. Martin J. Estevao, The Litigation Financing Industry: Regulation to Protect and Inform Consumers, 84 U. COLO. L. REV. 467, 471 (2013). Available at: https://scholar.law.colorado.edu/lawreview/vol84/iss2/6
2. Suneal Bedi and William C. Marra, The Shadows of Litigation Finance, 74 Vanderbilt Law Review 563, 574-575 (2021) Available at: https://scholarship.law.vanderbilt.edu/vlr/vol74/iss3/6; Shannon, Harmonizing Third-Party Litigation Funding Regulation, 36 Cardozo L. Rev. 862, 893 (2015).
3. Id. at 579.
4. Charles Silver, Litigation Funding versus Liability Insurance: What’s the Difference?, 63 DePaul L. Rev. 617, 631 (2014). Available at: https://via.library.depaul.edu/law-review/vol63/iss2/15
5. Shannon, supra, at 893.
6. Shannon, supra, at 893.
7. Joanna Shepherd, Judd E. Stone, Economic Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance, 47 Ariz. St. L.J. 919, 935 (2014); https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2432610
8. Silver, supra, at 893.
9. Bedi and Marra, supra, at 575.
10. Silver, supra, at 893.
11. Bedi and Marra, supra, at 575; Shannon, supra, at 893.
12. Silver, supra, at 618. Available at: https://via.library.depaul.edu/law-review/vol63/iss2/15
13. Id. at 619.
14. Id.
15. Id. at 619.
16. https://www.abajournal.com/news/article/delayed-justice-is-still-a-problem-after-covid-disruptions/
17. Estevao, supra, at 482.
18. Id. at 471
19. Estevao, supra, at 482.
20. https://www.npr.org/2023/09/20/1200327332/federal-reserve-inflation-economy-interest-rates
21. Shepherd and Stone, supra, at 934.
22. https://cartiga.com/articles/the-benefits-of-cartigas-consumer-legal-funding-fully-explained/
23. https://cartiga.com/articles/consumer-funding-increases-claimants-recoveries-in-personal-injury-cases.