Plaintiffs Winning More Cases as Result of Litigation Funding

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Matt Gracey

Matt Gracey

According to leading legal scholar Prof. Maya Steinitz at the University of Iowa College of Law, “Litigation funding is the most important civil justice development in this era.”

And while litigation funding—also called legal funding—may even the odds for plaintiffs who could not previously afford costly or drawn-out court cases, it is also creating an issue for physicians and medical malpractice insurance companies that are now up against potentially even stronger plaintiffs when litigation funding is involved.

“Litigation funding is a non-recourse funding of plaintiffs and their attorneys in return for a percentage of any settlement or jury awards,” explained Matt Gracey, managing director, Risk Strategies / Danna-Gracey. “These funds, which do not have to be paid back, are really just an investment in a lawsuit.”

Litigation funding provides an infusion of capital for plaintiff lawyers and their clients, and in turn, if the case is won, the funders
take between 10-15 percent of any award or judgement, though payment can go as high as 50 percent of awards.

“This is important because lawyers in most states cannot loan or give money to clients for living expenses as they try to get through a lawsuit,” said Gracey. “But with litigation funding, because the investors are not lawyers, they can give money to the actual

Because litigation funding is mostly unregulated, information about who has invested in a lawsuit is not available to the defense bar, and the sources are not discoverable. Investors can range from private financiers to hedge funds to private equity firms to an array of other investors.

“According to the Swiss Re Institute, in 2020, litigation funding reached $8.8 billion dollars globally,” said Gracey. “This affects medical malpractice insurers and the doctors they protect because it strengthens the plaintiff bar’s ability to take on cases, to not have to rush to settlement, and to be able to fund themselves and their clients through long, multidefendant cases.

“It has definitely increased the ability of the plaintiffs to win cases, not just against doctors, but in many other avenues of commercial litigation as well,” he added.

This is especially alarming when you consider that the 2020 report by the Swiss Re Institute showed that 85-90 percent of litigation-financed cases are won by the plaintiffs, with an average internal rate of return (IRR) on personal injury cases of 25-35 percent.

“My advice to doctors is to pay even more attention to the strength of their malpractice insurance companies; the weaker, less financially stable malpractice insurers will settle cases much more quickly,” said Gracey.

“While they take pride in winning cases, the fact that 85-90 percent of litigation-financed cases are being won by plaintiffs is very disturbing, because insurance companies have traditionally maintained an 85-90 percent win ratio when cases are taken to trial,” he continued.

He added that insurance companies are trying to determine what type of claims analysis litigation funders are using that results in this high-win ratio, including the use of advanced technology to determine which cases will be funded.

“What is very clear is that the defense bar and the insurance industry are facing a much stronger plaintiff bar; they are dealing with a much stronger adversary,” said Gracey. “So doctors need to be very aware of the financial abilities of their insurance companies to defend them. They need to be aware that in every case, litigation funding may be present, and that makes the stakes go up considerably.”