The rise of third-party litigation funding in Canada is prompting concern over its impact on the commercial insurance sector, according to a new report by global law firm Dentons LLP.
Commissioned by the Insurance Bureau of Canada (IBC), the report reviews litigation trends in Canada and the United States, with a focus on how financial entities use the legal system as a vehicle for investment. The study finds that law firms are increasingly relying on outside funding to pursue lawsuits that may otherwise lack the financial support to proceed.
“Law firms are increasingly using third-party litigation funding to pay to pursue claims that would likely not be pursued otherwise,” said Liam McGuinty, vice president of strategy at IBC.
While litigation funding was initially framed as a tool to promote access to justice, Dentons reports that its current use has shifted toward profit generation. This change, it states, is occurring largely without regulatory oversight in Canada.
The legal financing industry remains mostly unregulated, raising concerns that unchecked growth could affect the cost and structure of property and casualty insurance.
The report points to the US legal environment as a potential precedent. The US Chamber of Commerce has estimated the total cost of lawsuits there at 2.1% of the country's GDP – equivalent to approximately $4,207 per household.
Dentons suggests that although Canada has not reached similar levels of liability pressure, it is following comparable patterns, including a notable rise in class action filings and legal advertising.
In Canada, class actions have expanded in recent years. Dentons attributes this to aggressive promotional campaigns encouraging legal claims. The report indicates this increase in litigation activity may be influencing insurance claims and policy pricing.
McGuinty noted that while legal systems serve an essential role in resolving disputes, inefficiencies and gaps in oversight may allow for financial exploitation. He said the findings should inform how policymakers should respond to developments in the litigation space.
Dentons concludes that regulatory amendments are necessary to address the evolving function of litigation funding. It recommends limiting its use where the original intent – to support justice for those unable to afford legal action – is no longer the primary outcome.
Should Canadian regulators step in to define how third-party litigation funding is used in courts? Share your perspective in the comments.
