Efforts to bring transparency to third-party litigation financing a positive sign, say insurance groups

By Alex Zank, Advisen

A handful of victories in courtrooms and legislative chambers across the U.S. to pull back the curtain on third-party litigation financing may create momentum in efforts for broad tort reform, say legal experts and insurance industry observers.

Industry experts say the financing of plaintiffs by investors without direct interest in civil lawsuits contributes to social inflation, a term used to describe the steady increase in claims costs associated with higher settlement amounts and multimillion-dollar jury verdicts. The cost of social inflation is borne by policyholders through increased premiums.

Among those pushing for more transparency behind the practice is the American Property Casualty Insurance Association (APCIA), which pushes for disclosure of litigation funders in the claims process, discovery of it in litigation, and limitations on self-dealing, such as when financiers refer plaintiffs to specific doctors and lawyers, said James Whittle, vice president and counsel of APCIA.

“Shouldn’t we all know who’s influencing our civil justice system for profit? It seems self-evident that we would want to know that, and yet they’re doing a remarkably good job of fighting the disclosure and transparency related to their activities,” Whittle told Advisen. “The reason is simple, that they’re making a lot of money and they don’t want folks to start to recognize how they’re influencing the process.”

Third-party litigation financing includes commercial funding, where an investment firm supplies capital to a large-scale business dispute such as class actions or intellectual property cases, according to Alexia Cruz, senior vice president and claim general counsel at Travelers. Consumer funding includes direct loans to plaintiffs in personal injury cases and loans for medical expenses in lieu of health insurers footing the bill.

“Litigation funding, along with attorney advertising, plaintiff trial strategies, changing jury attitudes, strength of the plaintiff bar, infusion of capital, all of this bolsters the tort litigation environment,” Cruz said during a recent Travelers webinar. “It can have a real impact on claim costs by creating longer cycle times, higher settlement demands, and higher verdicts.”

Montana Gov. Greg Gianforte signed a tort reform package last month that included SB 269, which requires third-party financiers to disclose their involvement in lawsuits, limits interest rates and the share of recovery they can charge plaintiffs, and creates third-party litigation funding liability for court-ordered costs or penalties against the plaintiff.

With this legislation, Montana joins others including Wisconsin, West Virginia, and Indiana that have their own litigation-funding transparency laws. Lawmakers in 20 states introduced some kind of litigation-funding proposals this year, according to APCIA’s Whittle.

“We’re going to keep pushing this issue, because we all need to know who’s really involved in the civil justice system and the implications of that,” he said. “It’s incredibly important, so we think that legislation is going to keep going in the right direction on this.”

Industry groups also point to limited success in the courts. U.S. District Judge Colm Connolly of Delaware has a standing order that any parties in a lawsuit must disclose details of third-party funders. Connolly recently justified his order in what Reuters called a “thriller order.”

“Litigation funding is a multi-billion dollar industry that for years has driven up the length and cost of civil cases,” Neil Alldredge, president and CEO of the National Association of Mutual Insurance Companies, said in a statement this spring after Indiana passed its litigation-funding legislation. “While there is much more that needs to be done to address this issue, this law represents important progress.”

The Montana reform package also contained bills that require time-limited settlement demands allow 60 days for acceptance and include information insurers need for timely and reasonable claims settlement, provide for insurance claims cooperation/affirmative defense for insurers, and eliminate third-party common law bad faith.

Advocates for tort reform hope Montana’s actions could ignite similar efforts in other states. This very thing happened after Montana enacted phantom damages reform in 2021, according to Lauren Sheets Jarrell, director and counsel, civil justice policy at the American Tort Reform Association (ATRA), who spoke on the recent Travelers webinar.

“It’s probably not a state that’s on top of many companies’ lists, but what we’ve found is that positive things being done in Montana are then exported to other states, and it’s being used as a model,” Sheets Jarrell said. “It’s good that it’s happening there, because we can use that to propel efforts in other states.”

Tort reform has its opponents, however. Measures like Montana’s effectively make it “economically unfeasible” for policyholders who are victims of unfair insurance practices to use the civil courts to remedy the situation, Amy Bach, executive director of United Policyholders (UP), told Advisen in an email.

According to Bach, UP does not discount the problem of “opportunistic advertising-driven mass litigation.” However, lawmakers must seek a better solution than “via lobbyist-drafted legislation that makes it extremely risky to sue an insurer,” she said.

“It needs to not be too great a financial risk for lawyers to take their cases on and go up against well-resourced insurance company lawyers,” Bach wrote.

Reporter Alex Zank can be reached at alex.zank@zywave.com