What is the Risk when Investing on Litigation Loans?
This type of investment in a lawsuit, car accident settlement loans is generally offered as a loan in the form of “no recourse”, meaning that if the lawsuit is lost in the trial, the 3rd party investor will get nothing. Therefore, in general, investors will lose all their investments when making many investments if a proper investigation has not been made.
Auto Accident Pre Settlement Lawsuit Funding
Normally, the majority of cases are resolved early (at a conservative rate of 70% at the least), and regardless of the lawsuit goes below what’s been anticipated, an agreement can be reached, but not all of the originally agreed returns will be provided, but profits will decrease. It can be the return on capital or the return on just a few of the capital.
In essence, every lawsuit is unforeseen, and if you hear the case, the outcome could be binary. On the other hand, investors in litigation loans should be careful because the selected investment case could very well decrease the probability of any loss in investment.
Are there other risks?
Besides the chance of losing all the original investment, there exists a chance of paying out the successful opponent’s expenses, in the event the claimant themselves does not have the capital to pay for these costs.
Being a third party investor, you may wonder how this be possible as you are not directly part of the litigation. In the courts of England and Wales, they have wide authority to impose what is called non-party costs orders.
These kinds of orders carry out what they state on the tin which entitles the court to purchase a suitable person/company to be instructed to help in the expenses of court litigation which they have helped in financial terms, where they’ve done so expecting to gain financially.
A smart corporate structure and trust designed to confuse the court’s ability to make such orders would only have the opposite effect, giving the court a firmer commitment to assign liability.
A recent ruling also established that if the court instructed the payment of the fee based on the compensation, these costs should indeed be included in the investor’s responsibility, despite the current so-called Arkin limit.
Incidentally, although the judge questioned whether the ruling in the Arkin judgment was correct, he didn’t deviate from it.
Thus, in addition to the possibility of losing the entire investment, a third party funder could, in theory, be liable to double their loss.
Therefore, besides the chance of losing all the investment, third-party funders may also double their losses.