A Look at the Litigation Funder's Underwriting Process

Underwriting is a crucial component of the litigation funding process. It is the process by which the funder will be informed of their risk and will dictate whether or not they will decide to take on the funding for a lawsuit.

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Here's an interesting fact: The term 'underwriting' is taken from how the process was executed many years ago. Each risk-taker would write their name under the total amount of risk they were willing to accept for a specified premium.?

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Let's dive into the five principal segments that make up the underwriting process for litigation funders:

1. Is the Opportunity Viable?

Step one involves the funder’s initial discussions with the claimant and their legal counsel on a non-confidential basis. They will try and prove to the funder the merits of their case while, of course, refraining from providing any non-public information. The point of these talks is for the funder to decide whether the case is suitable for their risk model. They will focus on the expected funding budget and the potential for recovery.?

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2. Confidential Discussions?

Once interested in the case, the funder will take discussions a step further by offering the claimant a mutual non-disclosure agreement. A reputable funder will have a standard two-way confidentiality agreement ready as soon as initial discussions have taken place. The NDA aims to safeguard the confidentiality of all communications between them, the right to access the claimant's material, and protect communications with legal counsel and the claimant from possible disclosure. Once this agreement is signed, the funder can access essential information that will help them assess the case's potential and share with the claimant the type of financing structure they can offer.?

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3. Introductory Due Diligence

Next, the funder will evaluate the lawsuit to see whether the case offers a viable lawsuit funding opportunity. This initial evaluation involves an investigation as detailed in a recent article we published, How Does a Litigation Funder Know Your Claim is Viable. https://www.dhirubhai.net/pulse/how-does-litigation-funder-know-your-claim-viable-tai-collard-lzkyf/?trackingId=libB0iorSBmah9JZVQUqOw%3D%3D Reputable funders have an advanced process for approaching the introductory due diligence, complete with a checklist detailing the essential information that they will need to offer the claimant the commercial terms of the funding agreement. This process can sometimes take a long time, so the legal counsel must provide all the information the funder needs to evaluate whether they will be likely to take on the litigation funding proposal or not. This access to relevant information and documents will help speed up the process.?

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4. The Funding Arrangement

Once the introductory due diligence has taken place, the funder will draw up a term sheet stating the commercial terms of the funding arrangement. The term sheet usually includes a provision that proposes the funder's exclusive permission to review the case in further detail before putting a final funding contract in place. A respected funder will aim to have all the material portions of the agreement covered in this term sheet. The term sheet will evolve into the formal litigation funding agreement, stating the final approved commercial terms and any other agreed-upon provisions.?

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5. Final Due Diligence

With a signed term sheet in hand, it's time for the claimant and their legal counsel to answer any further due diligence questions. The funder will present a more extensive questionnaire with an exclusivity period noted. The funder and the experts they employ will then review the case and any relevant documents and meet with the claimant and legal counsel to uncover the answers to any outstanding questions they may have. At this point, it's essential for the funder to continually re-evaluate the litigation risk versus the length it is taking to complete the investigation. Re-evaluation is necessary because the opportunity cost risk is high if a funding agreement isn't reached.?

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Going Forward with Funding

If the funder's investigations are advancing positively, they will prepare a formal litigation funding agreement to set the framework of the funding relationship. It's advised that the claimant have the agreement reviewed by transactional counsel as their legal counsel are benefactors of the proposed? lawsuit funding, and in which case may present a conflict of interest.?

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If you want to stay up-to-date with what is going on with non-recourse litigation funding, Wild Dog serves as a trusted advisor to attorneys and their clients who are exploring litigation financing. So follow our Linkedin Page for the latest updates on?https://www.dhirubhai.net/company/wild-dog-mu?or visit our website?https://wilddog.mu?for more.