Litigation was once perceived as costly, time-consuming, and daunting. But in recent years, our society has grown more litigious, and the perception has changed somewhat. Enter third-party litigation funding (TPLF), a relatively new player in the legal ecosystem that aims to offset financial burdens for plaintiffs pursuing justice. But while TPLF opens the door to legal action for many who otherwise couldn’t afford it, its growing prevalence has effects that ripple across industries – none more so than insurance.

Now, we don’t expect anyone to “feel bad” for insurance companies. However, is TPLF “helping” the system – or harming it? Let’s discuss the impact on insureds – directly and indirectly.

What Is Third-Party Litigation Funding?

At its core, third-party litigation funding involves an outside entity – often a private investment firm and sometimes internationally-based – financing the cost of litigation for a plaintiff in exchange for a portion of any settlement or judgment. This arrangement is typically non-recourse, meaning the funder assumes the financial risk and receives nothing if the plaintiff loses the case.

For claimants, TPLF can be a lifeline. Legal battles often involve hefty court fees, attorney fees, and other related expenses, making it difficult for many individuals and small businesses to seek justice. With TPLF, funders bear those costs upfront, leveling the playing field by enabling access to legal resources that plaintiffs may otherwise not have afforded.

The Growing Influence of TPLF

Over the past decade, TPLF has transformed from a niche service to an expansive, global market. What began as an outlet for smaller claims has grown into a tool leveraged in high-stakes, multi-million-dollar class actions. According to recent industry estimates, the global litigation funding market has surged to tens of billions of dollars annually.

This rise can be attributed to several factors:

• Expansion beyond personal injury cases. While TPLF originated in smaller-scale claims, it now frequently funds high-value shareholder disputes, intellectual property suits, and even international arbitrations.

• Attractive returns for investors. TPLF firms often earn substantial portions of settlements or verdicts, resulting in returns that outpace many traditional investments.

• Evolving legal and regulatory environments. Many jurisdictions have clarified the legality of TPLF, boosting its adoption worldwide.

While this funding democratizes access to the courts, it has also escalated the volume – and complexity – of lawsuits being filed.

TPLF's Impact on Insurance Rates and Coverages

Though TPLF directly benefits plaintiffs, it contributes to a rise in litigation, which presents unique challenges for insurers. Here’s how the funding model trickles down to affect insurance costs and policies:

1. A Surge in Litigation Frequency and Settlement Costs

TPLF encourages lawsuits that might not otherwise be filed. For example, plaintiffs with limited financial resources may now feel empowered to pursue claims that once seemed unattainable. However, this increase in litigation activity doesn’t occur in isolation; many of these cases involve insurance entities defending their policyholders or payouts.

Furthermore, funders often pursue high-value claims. Knowing that TPLF firms expect a significant return on investment, parties may hold out for larger settlements rather than resolving disputes quickly. Insurers are left facing prolonged legal battles and inflated settlement demands, driving up their claims-related costs.

2. Rising Insurance Premiums

The increased contingent liability for insurers – stemming from a greater volume of filed claims and higher payouts – directly impacts insurance premiums. Insurers factor TPLF into their calculations as a cost driver, which policyholders ultimately pay through higher annual premiums.

Industries that are frequent targets for litigation, such as healthcare, construction, and financial services, may experience the starkest changes in premium pricing, as underwriters adjust to litigation trends fueled by TPLF.

3. Restricted Coverage Options

TPLF’s influence also extends to the scope of coverage available in liability insurance policies. Insurers may respond to increased risk by narrowing coverage terms or adding exclusions for certain types of litigation-prone claims. For instance, policies might include caps on legal expense coverage or impose premium surcharges based on the frequency of claims made within a specific industry.

4. Case Study Examples

To illustrate the tangible impact of TPLF on insurance, consider these examples:

• Medical Malpractice Insurance: A surge in medical malpractice suits involving TPLF-backed claimants led insurers in certain states to re-evaluate coverage limits for healthcare providers. The defensive costs incurred by protracted litigation forced premiums to climb as much as 20% in targeted regions.

• Corporate Liability Claims: Class actions funded by TPLF firms have caused increased scrutiny around directors’ and officers’ (D&O) liability insurance. Funders often back shareholder and securities claims, resulting in multimillion-dollar lawsuits. Consequently, D&O insurance premiums have skyrocketed, particularly for publicly traded companies.

Recommendations for Insurers and Policyholders

• Develop predictive litigation models. Insurers can use data-driven tools to forecast possible litigation trends linked to TPLF and adjust underwriting strategies accordingly.

• Educate customers. Policyholders should understand how the litigation landscape may impact their premiums and coverage limits. Encouraging risk management practices can help mitigate potential claims.

• Collaborate with regulators. Clearer regulations around disclosure of TPLF in lawsuits can help insurers better assess legal exposure.

• Explore alternative dispute resolutions. Mediation or arbitration can help insurers and litigants resolve disputes more quickly, reducing protracted court battles fueled by TPLF.

What’s Next?

Third-party litigation funding is reshaping the legal landscape, providing new challenges and some opportunities. However, its impact on insurance costs and coverages is undeniable. Insurers and insureds face increased risk exposure, which drives up premiums and alters the availability of liability policies. With proactive strategies, the insurance industry can adapt to this evolving dynamic without eroding its core value – protection.