As stated in the previous post, lawsuit loan or cash advance underwriting ultimately comes down to three different issues.

1. Lawsuit Considerations
2. Risk Management Considerations
3. Portfolio Management Considerations

For purposes of this entry, we will only discuss Risk Management Considerations. Portfolio Management will be discussed in a later entry as it pertains to the lawsuit loan funding business.

Risk Management Considerations.

While each lawsuit must be evaluated on its merits, considering the risk associated with these lawsuit loans or litigation cash advance fundings is a more complicated matter. In the litigation finance business where cash advances are routinely advanced to plaintiff’s involved in lawsuits, underwriters first consider the likelihood that a case will be successful.

The next question is the amount of the lawsuit loan itself. When making this decision, various methods are used by underwriters to manage the risk. For example, the risk associated with a lawsuit loan or cash advance is 100% of the investment. That is, since the investment (lawsuit loan) is either repaid if there is a recovery, or unpaid if the case is unsuccessful, then a lawsuit advance is totally at risk.

Contrast this with investing with a a stock for example. With stock investing, the price can not meet your expectations and you can sell it at a loss but not necessarily a total loss. Keeping the above in mind when considering pre-settlement lawsuit advances is the primary focus of an underwriter. And as stated earlier, many risk management methods are employed. One common method is to limit the amount of funding to 7%-10% of what the underwriter estimates the monetary value of the case.  For example, if the underwriting department feels a case is worth $100,000, the lawsuit funding company (Fair Rate Funding ) will limit the amount of the lawsuit cash advance to $10,000. Even though the client may request more money, the amount of the cash advance funding must remain at that level unless the case’s value increases.

The above is just but one risk management method employed by underwriters in the lawsuit loans business. We will discuss other methods in future posts.

Thank you for your interest in the lawsuit funding business.