Overview
When injuries prevent you from working and bills pile up, litigation funding can bridge the gap. This guide explains your options and what to watch out for.
Key takeaway
Litigation funding provides money to injured people while their case is pending. Repayment is contingent on the case outcome. If you lose, you typically owe nothing. Funding is expensive, often compounding at 2 to 4 percent per month. Medical liens allow treatment now with payment from the settlement later.
Overview of Litigation Funding in PI Cases
Litigation funding in the PI context encompasses several distinct categories:
- Attorney cost advancement: The law firm advances case costs (filing fees, expert fees, deposition costs) with repayment contingent on recovery
- Third-party litigation funding (client advances): A funding company provides cash to the client in exchange for repayment from settlement proceeds
- Medical treatment on lien: Healthcare providers treat the client and defer payment until the case resolves
- Case cost financing: External financing for the firm's case cost outlays
- Attorney fee financing: Arrangements to manage the firm's operating costs during protracted litigation
Every funding decision involves a trade-off between the client's immediate financial needs and their ultimate net recovery. As the attorney, your role is to help the client understand these trade-offs and make informed decisions. Never recommend funding without fully disclosing the costs.
Attorney Cost Advancement
The Ethical Framework
California Rules of Professional Conduct, Rule 1.8.5, permits a lawyer to:
- Advance court costs and litigation expenses, with repayment contingent on the outcome of the matter
- Guarantee or pay the costs of litigation on behalf of an indigent client
This is a critical distinction from many other jurisdictions: in California, the attorney may advance costs with repayment contingent on recovery, meaning the client owes nothing if the case is lost.
What Costs Are Typically Advanced
| Cost Category | Typical Range | When Incurred |
|---|---|---|
| Filing fees | $435-$1,000+ | Case filing |
| Service of process | $50-$200 per defendant | Early litigation |
| Court reporter / deposition transcripts | $1,000-$5,000+ per deposition | Discovery |
| Expert witness fees | $5,000-$50,000+ per expert | Discovery through trial |
| Medical record requests | $25-$500 per provider | Pre-litigation through trial |
| Mediation fees | $3,000-$15,000 | Mid-late litigation |
| Demonstrative exhibits | $2,000-$25,000+ | Trial preparation |
| Jury fees | $150/day | Trial |
| Investigator fees | $1,000-$10,000+ | Various |
| Travel expenses | Variable | Various |
Case Cost Budgeting
Effective case cost management requires budgeting at case intake and updating throughout the case lifecycle.
Process flow
See the interactive flowchart on this page.
Cost-to-Recovery Ratio Guidelines
As a general principle, the firm should not advance costs that exceed a reasonable proportion of the expected recovery. Consider these benchmarks:
| Expected Recovery | Maximum Reasonable Cost Investment |
|---|---|
| Under $50K | $5,000-$10,000 (10-20%) |
| $50K-$250K | $10,000-$40,000 (10-15%) |
| $250K-$1M | $40,000-$100,000 (10-15%) |
| Over $1M | $100,000-$300,000+ (case-specific) |
Cost Creep
Costs accumulate incrementally, and it is easy to lose track of the total investment in a case. Implement a system to track costs in real time (your case management software should support this). Review cost status before every major expenditure decision. A case that made financial sense at $20K in costs may not make sense at $80K.
At case intake, prepare a preliminary cost budget that estimates costs through each phase of litigation (pre-litigation, filing, discovery, experts, mediation, trial). Share this budget with the client during the retainer signing process so they understand the financial investment the firm is making. Update the budget at each major phase transition.
Third-Party Litigation Funding (Client Advances)
What Is Litigation Funding?
Third-party litigation funding (also called "pre-settlement funding" or "lawsuit loans") involves a funding company providing cash to the plaintiff in exchange for repayment -- plus fees and interest -- from the settlement or judgment proceeds.
How It Works
Process flow
See the interactive flowchart on this page.
Key Terms to Understand
| Term | Meaning |
|---|---|
| Advance amount | The cash provided to the client |
| Funding fee / interest rate | The cost of the advance (expressed as a rate or flat fee) |
| Compounding | Whether interest compounds (monthly, annually, or simple) |
| Non-recourse | Client owes nothing if the case is lost (standard in PI funding) |
| Repayment cap | Maximum total repayment amount (some companies cap at 2x-3x the advance) |
| Attorney acknowledgment | The attorney must sign acknowledging the funding arrangement and agreeing to pay the funding company from proceeds |
Interest Rate and Fee Concerns
Litigation funding fees can be extraordinarily expensive:
- Monthly rates of 2-5% are common (which equates to 24-60% annually)
- Some companies compound monthly, dramatically increasing the total cost
- A $10,000 advance at 3% monthly compounding can grow to $20,000+ within 2 years
- Without a repayment cap, the funding amount can exceed the client's net settlement
Litigation Funding Can Consume the Client's Recovery
A $15,000 advance at 3.5% monthly compounding will cost the client approximately $30,000 after 24 months and $45,000 after 36 months. If the case takes 3 years to resolve and the settlement is $100,000, the funding repayment alone may consume nearly half of the client's share after fees and costs. Always calculate the total repayment obligation at various case timelines before recommending funding.
Evaluating Funding Companies
Not all funding companies are equal. Evaluate each company on:
- [ ] Interest rate: What is the monthly/annual rate? Is it simple or compounding?
- [ ] Repayment cap: Is there a maximum repayment amount (e.g., 2x or 3x the advance)?
- [ ] Non-recourse: Is the funding truly non-recourse (client owes nothing if case is lost)?
- [ ] Transparency: Are all fees and terms clearly disclosed in the agreement?
- [ ] Origination fees: Are there upfront fees or origination charges?
- [ ] Contract language: Is the contract written in plain, understandable language?
- [ ] Reputation: Does the company have a track record of fair dealing?
- [ ] Speed: How quickly can the company fund (typical is 24-72 hours)?
- [ ] Minimum/maximum amounts: What range of advances does the company offer?
Preferred Funding Company Criteria
For firm-recommended funding companies, look for:
- Simple interest (not compounding) or low compounding rates
- Repayment caps (ideally 2x the advance)
- Transparent, plain-language contracts
- No hidden fees or origination charges
- Quick funding (within 48 hours)
- Willingness to work cooperatively with the firm
Maintain a short list of 2-3 vetted funding companies that you are comfortable recommending to clients. Having pre-vetted relationships allows you to quickly connect clients with reasonable funding while avoiding predatory companies. Review terms annually, as companies frequently change their rates and terms.
Ethical Considerations
California Rules of Professional Conduct
Several ethical rules govern litigation funding:
Rule 1.8.5 -- Payment of Personal or Business Expenses
A lawyer may advance court costs and litigation expenses, with repayment contingent on outcome. However, a lawyer generally may not provide financial assistance to a client beyond cost advancement. This means:
- Permitted: Advancing filing fees, expert fees, deposition costs, and other litigation expenses
- Generally not permitted: Paying the client's rent, car payment, or personal living expenses
- Gray area: Some California ethics opinions have allowed limited humanitarian assistance in exceptional circumstances, but this is risky
The Living Expenses Question
California Rule 1.8.5 is more restrictive than some other states on whether attorneys can provide living expense assistance to clients. The traditional rule prohibits it. However, the current rule (adopted in 2018) aligns more closely with ABA Model Rule 1.8(e), which permits financial assistance for living expenses to indigent clients in certain circumstances. When in doubt, consult the State Bar ethics hotline before providing any non-litigation financial assistance.
Rule 1.4 -- Communication
The attorney must:
- Explain the terms and costs of any recommended funding to the client
- Disclose any financial relationship between the firm and the funding company
- Ensure the client understands that funding is optional, not required
- Advise the client to review the funding agreement carefully
Rule 1.7 -- Conflicts of Interest
Potential conflicts arise when:
- The funding company's interests conflict with the client's (e.g., the funding company wants a quick settlement to ensure repayment, while the client's interests may be served by waiting)
- The attorney has a financial relationship with the funding company (referral fees, equity interests)
- The funding arrangement may influence the attorney's settlement recommendations
Attorney's Obligations When Clients Seek Funding
- [ ] Explain the cost of funding in clear, concrete terms (total repayment at various timelines)
- [ ] Advise the client that funding is optional and other options may exist
- [ ] Disclose any relationship between the firm and the funding company
- [ ] Do not pressure clients to take funding
- [ ] Ensure the client understands the non-recourse nature of the funding (if applicable)
- [ ] Review the funding agreement for reasonableness before recommending
- [ ] Document your advice and the client's decision
Fee-Splitting and Referral Fees
- Do not accept referral fees from funding companies for referring clients -- this creates a conflict of interest and may violate Rule 1.8.5 and Rule 7.2
- Do not take an equity interest in a funding company that funds your clients
- If you learn that a funding company is paying referral fees to attorneys, avoid that company
Medical Treatment on Lien
How Liens Work in PI
Medical treatment on lien is a cornerstone of California PI practice. When a client lacks health insurance or when health insurance coverage is exhausted, medical providers may agree to treat the client on a lien basis:
- The provider treats the client and defers payment
- The provider files a lien against the case proceeds
- The lien is repaid from the settlement or judgment
- If the case is lost, the provider may have recourse against the client (depending on the lien agreement)
Types of Medical Liens
| Lien Type | Description | Risk to Client |
|---|---|---|
| Doctor/provider lien | Private physician or clinic treats on lien | May seek payment from client if case lost (check agreement) |
| Hospital lien (CC 3045.1) | Hospital files statutory lien for emergency treatment | Limited to reasonable charges; attaches to settlement/judgment |
| Imaging/diagnostic lien | MRI, CT, X-ray facilities treat on lien | Similar to doctor lien |
| Physical therapy lien | PT provider treats on lien | Similar to doctor lien |
| Surgery center lien | Ambulatory surgery center treats on lien | Often the largest single lien |
Managing Medical Liens
- [ ] Obtain all lien agreements in writing at the start of treatment
- [ ] Track lien amounts throughout the case (update regularly)
- [ ] Negotiate lien amounts before settlement when possible
- [ ] Ensure lien agreements clearly state whether the provider has recourse against the client if the case is lost
- [ ] Advise clients to use health insurance when available (even with a co-pay, health insurance rates are lower than lien rates)
- [ ] Be aware of the total lien exposure relative to expected recovery
Lien Inflation
Some medical providers who treat on lien charge significantly more than prevailing market rates, knowing that the charges will be absorbed by the settlement. A provider that charges $15,000 for an MRI that would cost $1,500 with insurance inflates the total medical bills but does not proportionally increase the case value. Monitor charges and push back on unreasonable billing.
Build relationships with reputable medical providers who treat on lien at reasonable rates and provide quality care. A network of trusted lien doctors, surgeons, imaging centers, and physical therapists is invaluable. Avoid "lien mills" that churn patients through excessive, unnecessary treatment -- these providers damage your client's credibility and can undermine the case.
Cal. Civil Code 3040 -- Lien Reduction
Civil Code 3040 provides a framework for resolving medical lien disputes:
- The lienholder's recovery is subject to a reasonable reduction for attorney fees and costs
- The "common fund" doctrine entitles the lienholder to contribute to the costs of recovery
- Liens may be reduced proportionally when the settlement does not fully compensate the client
- Disputed liens may be resolved through negotiation or, if necessary, lien resolution proceedings
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When to Recommend Funding to Clients
Situations Where Funding May Be Appropriate
- [ ] Client is unable to work due to injuries and has no income
- [ ] Client is facing eviction, foreclosure, or utility shutoff
- [ ] Client cannot afford necessary medical treatment not available on lien
- [ ] Client is under financial pressure to accept an inadequate settlement offer
- [ ] Case is expected to resolve within 12-18 months (limiting interest accumulation)
- [ ] The funding amount is modest relative to expected net recovery
Situations Where Funding Should Be Discouraged
- [ ] Client has other sources of income or savings to draw upon
- [ ] Expected case timeline is long (24+ months), making interest costs prohibitive
- [ ] The net settlement may be insufficient to cover funding repayment plus other obligations
- [ ] The client's financial pressure is not severe enough to justify the cost
- [ ] The funding terms are unreasonable (high interest, no repayment cap, compounding)
The Funding Conversation
When a client asks about funding:
- Explain what it is: Non-recourse cash advance against future settlement proceeds
- Explain the cost: Provide specific dollar examples at different timelines
- Compare alternatives: Can the client borrow from family, use savings, negotiate with creditors, or access government assistance?
- Show the impact on net recovery: Prepare a net settlement sheet showing the client's take-home with and without funding at various settlement amounts
- Advise but do not decide: The decision is the client's; your role is to ensure it is informed
- Document: Memorialize your advice and the client's decision in the file
Funding Cost Example for Client Counseling
"If you take a $10,000 advance from a funding company at 3% monthly simple interest, here is what you would owe at different points: - After 6 months: $11,800 - After 12 months: $13,600 - After 18 months: $15,400 - After 24 months: $17,200 - After 36 months: $20,800 If your case settles for $150,000, after my fee of $50,000 and costs of $15,000, you would receive $85,000 before liens. The $10,000 advance would reduce that by $17,200 (if the case takes 2 years), bringing your net to $67,800. Without the advance, your net would be $85,000."
Case Cost Financing for the Firm
Firm-Level Financing Options
For firms that advance significant case costs, financing options include:
- Operating capital: Fund costs from firm revenue (no external cost)
- Line of credit: Revolving credit facility for case costs (interest is a business expense)
- Case cost loans: Specialized lenders provide loans secured by the firm's case portfolio
- Case-specific non-recourse funding: Funding companies invest in specific cases, repaid from proceeds
Evaluating Firm Financing
| Factor | Consideration |
|---|---|
| Interest rate | Compare to expected return on case investment |
| Recourse vs. non-recourse | Does the firm owe the money if the case is lost? |
| Covenants | Are there restrictions on case management decisions? |
| Reporting requirements | What information must the firm provide to the lender? |
| Impact on independence | Does the financing arrangement compromise the firm's independent judgment? |
Ethical Constraints on Firm Financing
- The firm must maintain independent professional judgment regardless of financing arrangements
- External funders cannot direct case strategy or settlement decisions
- Client confidential information must be protected (limit disclosures to what is necessary)
- The existence of case cost financing should be disclosed to clients if it materially affects the representation
Impact of Funding on Case Strategy
Settlement Timing Pressure
Litigation funding creates countervailing pressures on settlement timing:
- Client pressure: A client with mounting funding costs may want to settle sooner, even for less
- Attorney obligation: The attorney must recommend what is in the client's best interest, not what resolves the funding pressure fastest
- Funding company interest: The funding company benefits from resolution (triggering repayment) but also from delay (more interest accumulates)
How to Manage Funding Pressure
- Set clear expectations with the client about case timeline at the outset
- Advise the client to take the minimum funding amount necessary
- Discourage multiple rounds of funding (each round increases the total cost)
- If funding costs are approaching the point where they will significantly reduce the client's net recovery, have a candid conversation about settlement options
- Never let funding pressure drive you to recommend an inadequate settlement
Tax Implications of Litigation Funding
For the Client
- Litigation funding advances are generally treated as non-recourse loans, not income
- Repayment from settlement proceeds is not a taxable event (it is repayment of a loan)
- However, the tax treatment of litigation funding fees/interest is unsettled and may vary
- Advise clients to consult a tax professional regarding their specific circumstances
For the Firm
- Case costs advanced by the firm are generally deductible as business expenses when incurred (cash method) or when the obligation arises (accrual method)
- Interest on case cost financing is a deductible business expense
- Recovered case costs are included in firm income when received
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Regulatory Landscape
California Regulation of Litigation Funding
California does not currently have comprehensive legislation specifically regulating consumer litigation funding. However:
- Consumer protection laws (e.g., the CLRA, UCL) may apply to predatory funding practices
- Usury laws: California's usury statute (Cal. Const., Art. XV) may apply to litigation funding, though many funding companies structure their products to avoid usury claims (e.g., by characterizing the transaction as a purchase of a contingent interest rather than a loan)
- Disclosure requirements: Some municipalities and pending legislation may impose disclosure requirements on funding companies
- Attorney regulatory obligations: The Rules of Professional Conduct govern the attorney's role in the funding process
Evolving Regulation
The regulation of litigation funding is evolving rapidly. Several bills have been introduced in the California Legislature to regulate the industry, including proposals for interest rate caps, disclosure requirements, and licensing requirements. Stay current on legislative developments that may affect your clients' funding options.
Best Practices for Compliance
- [ ] Ensure all funding agreements are in writing
- [ ] Verify that funding terms comply with applicable consumer protection laws
- [ ] Advise clients to read and understand the funding agreement before signing
- [ ] Retain copies of all funding agreements in the client file
- [ ] Track funding repayment obligations as part of the lien summary
- [ ] Report funding repayments on the final disbursement statement
Litigation Funding Checklist
Before Recommending Funding
- [ ] Assess the client's genuine financial need
- [ ] Explore alternatives to litigation funding
- [ ] Evaluate the case timeline and expected resolution date
- [ ] Calculate the total repayment at various case durations
- [ ] Compare repayment to expected net recovery
- [ ] Identify 2-3 reputable funding companies with reasonable terms
- [ ] Disclose any relationship between the firm and the funding company
During the Funding Process
- [ ] Ensure the client receives and reviews the funding agreement
- [ ] Verify the funding is non-recourse
- [ ] Confirm there is a reasonable repayment cap
- [ ] Obtain a copy of the signed funding agreement for the file
- [ ] Sign the attorney acknowledgment letter (required by most funding companies)
- [ ] Update the case lien/obligation summary
At Settlement
- [ ] Obtain the current payoff amount from the funding company
- [ ] Include the funding repayment on the settlement disbursement sheet
- [ ] Pay the funding company from the client trust account
- [ ] Obtain a satisfaction/release letter from the funding company
- [ ] Provide the client with a complete accounting
Cross-References
- Settlement Negotiation -- How funding costs affect negotiation strategy
- Settlement Agreements -- Addressing funding in settlement documents
- Mediation -- Client financial pressure at mediation
- Structured Settlements -- Alternative to lump-sum recovery
- Demands and Offers -- Demand timing relative to case financing
- Retainer Agreements -- Fee agreements and cost advancement provisions
- Trust Accounts -- Handling settlement funds and lien payments
Cross-References
- Settlement Negotiation
- Mediation
- Demands & Offers
- Settlement Agreements
- Structured Settlements
- CCP 998 Offers
Common Questions
What is litigation funding?
Litigation funding, sometimes called a lawsuit loan or pre-settlement advance, provides money to injured people while their case is pending. It is technically not a loan because repayment is contingent on the outcome of your case. If you lose, you typically owe nothing. The funding company takes its repayment from the settlement or verdict.
How much does litigation funding cost?
Litigation funding is expensive. Companies typically charge between 2 and 4 percent per month, which compounds over time. On a case that takes two years to resolve, the total repayment can be two to three times the original advance. Your attorney should carefully evaluate whether funding is necessary and help you understand the true cost.
Can my attorney advance me money?
California Rules of Professional Conduct permit attorneys to advance case costs such as filing fees, expert witness fees, and medical record costs. However, attorneys generally cannot advance living expenses to clients. There are narrow exceptions for indigent clients under certain circumstances.
What are medical liens?
A medical lien allows you to receive medical treatment now and pay for it from your settlement or verdict later. The medical provider agrees to wait for payment and places a lien on your case. This ensures you can get the treatment you need even if you cannot afford to pay out of pocket while your case is pending.
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Local Resources
- LA Superior Court · Stanley MoskCivil filings for LA County cases.
- CA Courts Self-HelpFree court information and forms.
- CAALA — Consumer Attorneys of LAFind a qualified plaintiff trial attorney.
- CA State Bar LookupVerify any attorney's license before hiring.
- Cedars-Sinai EmergencyLos Angeles trauma center.
- California Rules of Professional Conduct Rule 1.8.5. Attorney financial assistance to clients.
- California Civil Code § 1788-1788.32. Consumer credit regulations applicable to funding.
- Oasis Legal Finance v. Suthers (2009). Litigation funding classification as non-recourse.
- California Business & Professions Code § 17200. Unfair business practices applicable to funding companies.
- California Insurance Code § 10113.1. Regulatory framework for litigation funding.
- American Bar Association Formal Opinion 484. Ethical considerations in third-party litigation funding.