Justice for Sale: Third Party Litigation Funding

How Third-Party Litigation Funding affects your Wallet

Our commitment to clients extends beyond advisement and solutions to drive growth while preserving the organization's assets, reputation, and people.  We are dedicated to raising awareness of critical issues that impact insurance pricing and affordability. 

 Third-party litigation funding (TPLF) is a secretive, manipulative financial arrangement where an unknown third-party provides capital to support a plaintiff's legal case in exchange for a share of the eventual settlement or judgment.  Evidence suggests that insurers and policyholders ultimately bear the financial burden of this monetary infusion into the litigation industry. 

• This practice encourages private/unknown investors with no ties to the injured person to invest in lawsuits, and in some cases falsely inflate medical costs, for their own profit
• Encourages plaintiff lawyers, medical providers, and financers to increase claims damages with the intention of increasing the return on “investment”
• Lengthens the time to resolve matters, increasing legal costs 
• Reduces the efficiency of the civil justice system
  • Litigation firms may be driving the decision on what sort of litigation ought to be filed and against whom, increasing the court backlog
• Settlement awards are redirected away from the plaintiff to the investor 
  • In some cases, lenders charge extremely high rates, or they may be purchasing part of the settlement

Fact or Fiction?

Data indicates that TPLF may drive social inflation, which is defined as the impact of rising litigation costs on insurers’ claim payouts, loss ratios, having a direct impact on how much policyholders pay for coverage. While there’s no universally agreed-upon definition, frequently mentioned aspects include: 

• Escalation of class-action suits and other lawyer and government-driven actions (“runaway litigation”)
• Growing awards from sympathetic juries (“nuclear verdicts”)
  • negative sentiment toward corporations and desensitization to large jury awards
  • the perception that the corporation and its insurance carrier "can afford to pay"
• “Litigation funding” – in which investors finance lawsuits against large companies in return for a share in the settlement

Unlike general economic inflation which insurers can address through pricing models and loss reserves, social inflation arises from factors that are challenging to forecast.  More frequent and larger awards can increase insurance costs as rates are adjusted to reflect the changing risk profile. 

Protecting policy affordability requires reforms to provide transparency in TPLF agreements.  Disclosure of such arrangements at the outset of litigation or upon entering a funding agreement would provide parties and courts with vital information to assess the influence of funders on the litigation, while encouraging efficient use of the legal system.  The primary objective of the U.S. legal system is to address and adjudicate civil and criminal cases, emphasizing justice rather than serving as a profit-driven enterprise.

Koppinger & Associates - helping navigate the maze of fact and fiction 

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