The Underwriting Process in Litigation Funding Explained

GLS Capital is a litigation finance firm founded by litigation finance veterans and it has deeply experienced underwriters analyzing and assessing new funding opportunities. GLS performs most of its legal diligence in-house, and as a result we’re able to offer swift funding for attorneys and plaintiffs at competitive rates. 

Underwriters play a vital role in the process of due diligence and case analysis. However, most people unfamiliar with the litigation finance industry have little to no knowledge of underwriters or their duties. This article is intended to educate both attorneys and plaintiffs on the litigation financing process and procedures involved in reviewing cases. If you have any questions during the course of reading this article, please don’t hesitate to contact one of our underwriters.

Why It’s Important To Understand the Underwriting Process

Understanding the underwriting and analysis process will help attorneys and their clients in applying for litigation financing in several ways.

  • It will help determine whether the finance options you’re looking at are right for your business or situation. 
  • It will give an idea of what requirements exist to qualify for the type of financing you’re seeking, as well as the qualities that litigation finance underwriters look for when evaluating new funding opportunities.
  • It will help to provide an understanding of the different methods used for underwriting. For example, some firms take a more hands-on, personal approach; others completely depend on automated systems.
  • It will explain what to highlight in a funding application, as well as any potential questions that underwriters might bring up while discussing the situation. Being prepared to discuss these points with an underwriter can expedite the process and help the client and the funder reach an agreement more quickly.

What Do Underwriters Do?

If you’ve ever purchased insurance at some point in your life, it’s likely you’ve already dealt with an underwriter. Likewise, anyone who has ever received a loan or credit likely had an underwriter involved in the approval process. Litigation finance underwriters are quite similar. For example, the underwriters at GLS Capital collectively have several decades of litigation experience at large law firms and sophisticated corporate legal departments.  They have the experience to evaluate the risk and the potential of lawsuits in a quick and efficient manner.  Unlike underwriters in other industries, litigation funding underwriters will work directly with clients through an iterative diligence process.

What Do Underwriters Evaluate or Analyze?

Law firms and plaintiffs view the strength of their evidence and credibility of their witnesses as the cornerstones of a case. They’re correct to hold such a view when preparing to pursue litigation against a defendant. 

On the other hand, when it comes to litigation funders, the best way to improve confidence is for the attorneys and plaintiffs to not just highlight the strengths of the case but also pinpoint and comprehensively understand the risks as well. This includes anticipating the other side’s defense strategy and analyzing all other material aspects of the case as well, including the parties, attorneys, law firms involved and the jurisdiction in which the case will be brought. By presenting the underwriters with a well-rounded and thoughtful analysis of the case, including key pieces of evidence, a plaintiff seeking funding will enable the underwriter to conduct due diligence more effectively. As a result, you will receive a decision concerning your proposal for financing a lot sooner. 

When it comes to litigation finance, there are three principal areas of interest for underwriters: the merits, the plaintiff, and the potential award.

1. The Merits 

Litigation finance differs from other asset classes in that we invest in lawsuits, which are difficult to quantify and inherently full of risk. Unlike traditional private equity, we always face the possibility of coming out of an investment with no return if our side should lose their dispute. As such, our underwriters focus on the merits underlying the complaint above all. In analyzing a complaint, underwriters will look at the facts of the case, the court in which it is filed, the types of claims brought, the counsel representing the plaintiff, and the overall narrative describing the harm which prompted the lawsuit. Underwriters will evaluate the facts in each new matter against established case law and compare the merits to other similar situations. All of these factors help underwriters gain a better sense of a plaintiff’s practical likelihood of success.

The in-house underwriters at GLS Capital have a breadth of experience that allows them to analyze the validity of a wide range of claim types and jurisdictions based on particular evidence and facts and the applicable law. In this way, we can be confident in our decision whether to fund a certain case or not.

2. The Plaintiff

Funders want to know and understand the plaintiff’s motivation for seeking litigation funding. In most cases, plaintiffs might have insufficient resources to pursue a claim on their own, they may want to mitigate risk, or even just keep their company’s cash available for business. 

In addition to the plaintiff’s reasons to pursue financing, a funder will seek to gauge the plaintiff’s mindset concerning the litigation itself. The funder must feel confident that the plaintiff has reasonable expectations for the outcome of the litigation and is prepared for the difficulties they will face in getting to that endpoint. Litigation is often a longer and more exhaustive process than many plaintiffs expect at the outset. A good working relationship with counsel is essential to a plaintiff’s ability to stay committed to a lawsuit through final judgment and collection of the proceeds. 

Because a funder does not have control over the litigation in which it is investing, funders need to make sure that their interests in the investment are aligned with those of the plaintiff. A funding agreement must be structured to benefit to both parties in the transaction, but any financing relationship will necessarily also involve trust and cooperation. 

3. The Potential Award

The size of a possible award needs to be adequate to yield the funder with a profit to meet the financing risk in addition to sufficient compensation for the plaintiff. Costs will accrue from the start of the funding process through collection of the final judgment, so the funder must feel confident that if the case is won, it’s likely to produce a recovery sufficient to be an economically reasonable investment. 

In addition to the size of the expected award, underwriters also investigate the collectability risk, or the possibility that defendants won’t be able to gather the funds to pay the full judgment amount. Even if the facts are compelling and the plaintiff has a good chance of winning the case on the legal merits, an investment isn’t feasible if the funder believes an award won’t be collectible. 

4. Deal Structure

In addition to the legal merits of a case, a litigation finance underwriter must consider the proposed deal structure and economics of a proposed investment.  Litigation funders are typically repaid their capital plus an investment return from the proceeds of a successful case.  Therefore, an underwriter will need to carefully consider the economics of a potential investment including the structure of the return in order to fully consider the financial risk and reward that the case presents to the litigation funder.    

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Underwriting analysis is a vital component of the litigation funding process. It closely resembles litigation risk analysis practiced by attorneys, alternative dispute resolution professionals, and mediators, plus the investment terms and structure. In addition, an underwriter will likely be a plaintiff’s principal contact within a litigation funding firm. Understanding how an underwriter evaluates a funding opportunity can make a big difference in a plaintiff’s success in securing financing. As in most situations, preparation is key.

If you have any further questions concerning the litigation financing process or about how we conduct our underwriting process, please Jeffery Lula (jlula@glscap.com) or any of the Principals at GLS Capital today.