Insurers hail first-in-the-nation ban against litigation funding

North Carolina has become the first US state to ban third-party litigation funding, drawning strong backing from the insurance industry and marking a new escalation in efforts to curb outside investment in civil lawsuits.

Governor Josh Stein signed House Bill 315 into law this week, making it unlawful for outside parties to finance civil litigation in the state in exchange for a financial stake tied to a case's outcome. The measure authorizes the state attorney general to seek injunctions and civil penalties of up to $50,000 per violation, and allows injured parties to recover treble damages based on the value of an unlawful litigation investment.

The law leaves common arrangements untouched. It carves out insurers' contractual obligations to defend or indemnify policyholders, traditional contingency-fee agreements, nonprofit and legal-aid funding, financial support from immediate family, and direct loans whose repayment is not contingent on the outcome of a case. Contracts that violate the statute are rendered unenforceable.

The legislation passed with overwhelming bipartisan support, clearing the state House 112-0 and the Senate 45-1.

Insurance industry hails landmark litigation funding ban

The law goes further than the disclosure measures being debated elsewhere by imposing a near-total prohibition on litigation investment rather than merely requiring transparency. It arrives as lawmakers in states including California, Colorado and Illinois weigh restrictions on the role outside investors can play in legal disputes, according to Reuters.

The Insurance Information Institute (Triple-I) has welcomed the legislation, arguing that third-party litigation funding has become a major contributor to rising litigation costs and broader legal system abuse.

"Third-party litigation investment has become an increasingly significant driver of legal system abuse, injecting profit motives into disputes that should be resolved on their merits," said Mark Friedlander of the Triple-I. "North Carolina's historic action sends a clear message that the civil justice system is not an investment vehicle."

Friedlander added that the law "helps protect consumers, businesses and communities from the rising costs associated with excessive legal activity."

Part of a broader state-level push

The ban is the most aggressive state action taken against third-party litigation funding to date, but it forms part of a wider wave of legislative activity as policymakers confront the rapid expansion of the multibillion-dollar industry.

Several have now enacted some form of restriction, ranging from light-touch disclosure to funder registration, recovery caps and bars on foreign-backed financing.

The pressure is also building beyond the legislatures. The Insurance Services Office has introduced an optional "Litigation Funding Mutual Disclosure" endorsement for 2026 commercial liability programs, a mutual-disclosure condition that, in practice, gives insurers a route to obtain funding details in coverage disputes.

Separately, the US Judicial Conference's Advisory Committee on Civil Rules met in October 2025 to weigh a federal disclosure rule and agreed to continue studying the question.

At the federal level, lawmakers have repeatedly pursued disclosure rather than prohibition. In February, Senator Chuck Grassley, joined by North Carolina's Thom Tillis and Senators John Kennedy and John Cornyn, reintroduced the Litigation Funding Transparency Act, which would require disclosure of third-party funding in federal class actions and multidistrict litigation and bar funders from steering strategy or settlement. The bill is backed by the US Chamber of Commerce but has yet to advance.

Debate shifts from disclosure to access to justice

Supporters of the law, including the US Chamber of Commerce, argue that litigation finance lets investors profit from lawsuits while driving up legal costs and prolonging disputes.

Litigation finance firms and many plaintiff attorneys counter that the practice expands access to justice, enabling individuals and businesses with legitimate claims to take on well-funded defendants. They have opposed broad restrictions, arguing that existing ethical rules and judicial oversight already provide adequate safeguards. Some access-to-justice advocates warn that a full ban could shut ordinary claimants out of complex, costly cases that are not viable on a contingency-fee basis alone.

North Carolina's move is likely to intensify the national debate, with other states now facing pressure to choose between disclosure, tighter regulation, or — as North Carolina has done — an outright ban.