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Third-Party Litigation Funding: Who’s Calling the Shots?

As insurance carriers work to assess risk and assign value to insurance claims, it is important to understand and consider how social inflation impacts the rise in claim values. Social inflation describes how insurers’ claims’ costs increase above general economic inflation.[1] While many factors can lead to social inflation, the increasing popularity of third-party litigation funding (“TPLF”) in commercial, bodily injury, and wrongful death claims is one such quickly growing factor.[2]

What is Third Party Litigation Funding?

Third-party litigation funding is relatively new in the United States. It began in Australia, extended to Europe, and by 2010, the practice made its way to the U.S. TPLF allows investment firms and other third parties to financially back lawsuits in exchange for a percentage of any settlement or judgment if a lawsuit is successful.[3] Recipients of third-party litigation funding can be either individual plaintiffs or corporate claimants. Commercial agreements are executed between investors and corporate litigants or law firms, while consumer agreements are between an investor and an individual, such as the plaintiff in a personal injury case. Under a consumer agreement, investors sometimes provide money to plaintiffs to pay for living or medical expenses they may incur while a case is litigated in exchange for a cut of the settlement money or jury verdict if successful. Defendants should view these financial arrangements with skepticism. Allowing a non-party to have a stake in the outcome of a case either through settlement or a jury verdict raises many uncertainties, and undoubtedly impacts the value of a case.

Impact of TPLF on Litigation

Insurance carriers have noted an increase in multimillion-dollar claims in the U.S. in general liability and commercial auto claims. Contributing to this increase in value is TPLF, which incentivizes filing and prolonging lawsuits while diverting a percentage of any recovery to the investor instead of the injured plaintiff. These additional costs are difficult for insurers to quantify and mitigate given that they are hard to predict.

TPLF impacts litigation in several ways:

  • Disincentivizes efficient litigation because law firms may receive payments regardless of a case’s outcome;
  • Claimants receiving funding may revise their settlement strategy given that he or she will have to repay a portion of the settlement to the investor. Thus, in addition to medical payments or Medicare liens, knowing the details of any arrangement a plaintiff has with an investor is critical to analyzing the value of a claim or assessing a potential jury verdict.
  • Similarly, in instances where a claimant’s medical bills are being paid by another, a plaintiff may seek additional medical care though otherwise unnecessary given that they have no financial responsibility for the charges incurred.
  • Moreover, juries may not receive accurate information with respect to who receives money awarded as damages, which may influence their deliberations.[4]

To combat this trend, state legislatures should work to pass legislation to generate transparency and oversight of the practice of TPLF.

Efforts to Improve Transparency and Oversight

Because of its potential impact on the value of a claim and to understand a plaintiff’s motivation in the litigation, defense counsel should be diligent in conducting discovery with respect to TPLF. Some states have already passed legislation regarding the disclosure of TPLF, while others have such bills pending. In 2018, Wisconsin became the first state to pass legislation regulating the disclosure of TPLF. See 2017 Wisconsin Act 235. Wis. Stat. §804.01(2)(bg) requires the disclosure of TPLF without a discovery request for such information:

Except as otherwise stipulated or ordered by the court, a party shall, without awaiting a discovery request, provide to the other parties any agreement under which any person, other than an attorney permitted to charge a contingent fee representing a party, has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise.

Wis. Stat. §804.01(2)(bg) (emphasis added). Other states, including West Virgina, have also passed similar statutes. See e.g. W. Va. Code Ann. §46A-6N-6. Legislation addressing the disclosure of litigation funding is also currently pending in at least ten states. These proposed statutes address, among other things, the disclosure of TPLF, contract requirements, consumer protections, and the applicability of usury laws.[5]

To mitigate the uncertainty surrounding TPLF, it is important for defense attorneys to inquire regarding the existence of any third-party funding agreements that may impact the litigation. The Wisconsin legislature recognized the need for transparency in the process, and it is up to defense counsel to make sure the plaintiffs comply with the disclosure requirements.

References: [1] Social Inflation. NAIC. (last visited Feb. 28, 2024). | [2] Social Inflatio0n: Fighting Back Against the Rise of Nuclear Verdicts. DRI. (last visited Feb. 29, 2024). | [3] What You Need to Know About Third Party Litigation Funding. US Chamber of Commerce ILR. (last visited Feb. 28, 2024.) | [4] Third Party Litigation Funding Explained. SCS Agency Inc. (last visited Feb. 28, 2024). | [5] State Law Makers Wade Into Third-Party Litigation Funding. LexisNexis. (last visited Feb. 28, 2024).

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