The following was contributed by Eric K. Schuller, President, The Alliance for Responsible Consumer Legal Funding (ARC).

If policymakers want to understand consumer legal funding, they should start with insurance, not lending. At first glance, insurance and consumer legal funding may appear unrelated. One protects against risk. The other provides funds to plaintiffs in pending lawsuits to help pay for their day-to-day expenses. But structurally, they share a defining characteristic: risk is assumed by the capital provider, not imposed on the consumer. That single feature separates consumer legal funding from loans and aligns it more closely with underwriting.

Public policy depends on accurate classification. When a product is mischaracterized, regulation can miss its mark. Consumer legal funding is frequently labeled a “loan,” yet its mechanics contradict that description. A loan creates a guaranteed repayment obligation. Consumer legal funding does not. To regulate wisely, lawmakers must understand that distinction.

Insurance is built on underwriting risk. An insurance company evaluates probabilities. It examines health risks, property risks, liability exposure, accident frequency. It prices policies accordingly. The insurer does not lend money to the policyholder. Instead, it assumes risk in exchange for compensation. If the insured event occurs, the insurer pays. If the event does not occur, the insurer retains the premium. In either case, the insurer’s business model depends on accepting uncertainty. Insurance is not debt. It is risk transfer.

Now consider consumer legal funding. A funding company evaluates a legal claim. It assesses liability, damages, collectability, procedural posture, and likely duration. It underwrites the case. Instead of collecting premiums, it provides monies to the plaintiff. Its return depends entirely on a defined event: recovery in the lawsuit. If recovery occurs, the provider receives its agreed return from the proceeds. If recovery does not occur, the provider receives nothing. The funding company has effectively underwritten litigation risk. That is not lending. That is risk assumption.

The central question in distinguishing loans from contingent capital is simple: Who bears the risk of failure? In a loan, the borrower bears the risk. Repayment is mandatory regardless of outcome. In insurance, the insurer bears the risk. Payment depends on whether a covered event occurs. In consumer legal funding, the funding company bears the risk. Repayment depends on whether the case succeeds. If a plaintiff loses their case, they owe nothing. There is no collection action, no wage garnishment, no deficiency balance. The capital provider absorbs the loss. That structure is fundamentally inconsistent with debt.

To see the contrast clearly, consider the defining characteristics of a traditional loan: an unconditional obligation to repay, repayment regardless of performance or outcome, interest accrual over time, recourse against income or assets, and credit-based underwriting. If you borrow money to open a business and the business fails, you still owe the bank. If you lose your job after taking out a personal loan, you still owe the lender. If you use a credit card and experience hardship, the balance remains. Debt survives failure. Consumer legal funding does not. If there is no recovery in the legal claim, there is no repayment obligation. That single fact removes the defining feature of a loan.

Insurance companies price risk across portfolios. Some claims will generate losses. Others will generate gains. Sustainability depends on aggregate performance. Consumer legal funding companies operate similarly. Some cases succeed. Others fail. Pricing reflects probability of recovery, expected timeline, and litigation risk. Like insurers, funding providers must absorb unsuccessful outcomes as part of their business model. If policymakers were to impose lending-style interest caps on insurance premiums, the insurance market would collapse. Premiums are not structured like loan interest because repayment is not guaranteed. Similarly, consumer legal funding cannot be evaluated as if repayment were certain. The risk of total loss is real. When regulation ignores that risk allocation, it misunderstands the economics.

Labeling consumer legal funding as a loan may appear harmless, but it has significant policy consequences. Lending regulations are built around products where repayment is guaranteed and borrowers bear default risk. Those regulations assume predictable interest accrual and enforceable repayment obligations. Consumer legal funding lacks those features. If policymakers apply lending frameworks to non-recourse, outcome-dependent arrangements, they risk imposing regulatory structures that do not fit the product, distorting pricing models built around risk of total loss, reducing availability of funding for injured consumers, and eliminating a non-recourse option that differs fundamentally from debt. Regulation should reflect economic reality, not rhetorical convenience.

For injured plaintiffs, litigation is rarely quick. Cases may take months or years to resolve. During that time, medical bills accumulate. Rent is due. Utilities must be paid. Families rely on a steady income that may no longer exist. Traditional loans require fixed repayment regardless of outcome. Insurance does not. Consumer legal funding does not. That distinction explains why some consumers choose it. They are not borrowing against wages or income. They are accessing funds tied to a potential asset — their legal claim. If that asset produces value, repayment occurs from that value. If it does not, there is no personal debt. That is not debt stacking. It is risk sharing.

The core issue is risk transfer. Debt transfers risk to the borrower. Insurance transfers risk to the insurer. Consumer legal funding transfers litigation outcome risk to the funding company. The defining feature of a loan is an unconditional promise to repay. Without that promise, the structure changes entirely. If there is no recovery and the consumer owes nothing, the essential element of debt is absent. Policy debates should begin with that structural truth.

None of this suggests that consumer legal funding should operate without oversight. Transparent contracts, disclosure requirements, and consumer protections are appropriate in any financial arrangement. But regulation must match mechanics. Insurance is regulated as insurance because it is risk underwriting. Debt is regulated as lending because repayment is guaranteed. Consumer legal funding is non-recourse and outcome-dependent. It should be evaluated through that lens. When lawmakers start from the wrong definition, unintended consequences follow.

Consumer legal funding is non-recourse, payable only from legal proceeds, transfers outcome risk to the capital provider, and creates no unconditional repayment obligation. It shares structural similarities with insurance underwriting and other contingent compensation arrangements where payment depends on performance. The defining feature of a loan is guaranteed repayment. Consumer legal funding has no such guarantee. Before regulating it as debt, policymakers should ask a simple question: If the case fails and the consumer owes nothing, where is the loan? Sound public policy begins with structural accuracy.