An article in the New York Times takes a closer look at how banks, hedge funds and private investors are investing hundreds of millions of dollars into others’ lawsuits in the hope of taking a share of any settlement or damages award.

According to a review by the NYT and the Center for Public Integrity, the rise of lending to plaintiffs and their lawyers is a result of the high cost of litigation and is giving more people their day in court.

However, it goes on to highlight some problems with the practice, such as investors initiating and controlling cases and plaintiffs being hit with sky-high interest payments on lawsuit loans, the costs of which can exceed the benefits of winning a case.

For example, the NYT article mentions a woman injured in a 1995 car accident outside Philadelphia who borrowed money for a suit, along with her lawyer. By the time she won $169,125 in 2003, the lenders were owed $221,000.

Lawyers for ground zero workers whose health was damaged during the rescue and clean up following the terrorist attack of 9/11 borrowed more than $35 million, the article says.

A $712.5 million settlement was announced in June and workers have until today to approve it. Of the costs billed to clients - some $6.1 million of $11 million in interest payments, the NYT reports.

According to a 2009 report by the Institute for Legal Reform (ILR) titled “Selling Lawsuits: Buying Trouble”, third-party litigation funding is playing an increasingly visible and potentially harmful role in U.S. litigation and is a recipe for abuse.

ILR said the root problem with third-party litigation financing is that it introduces a stranger to the attorney-client relationship whose sole interest is a financial one.

The Wall Street Journal Law blog has more on this story.

Check out I.I.I. information on the liability system and I.I.I. facts and stats on litigiousness.