The Insurance Information Institute (Triple-I) has published a new report which condemns investors who do not have stakes in a lawsuit beyond a desire to profit from its outcome, for contributing to the surge in insurer legal costs and settlement payouts.
"Third-party litigation funding (TPLF) has devastatingly become a multi-billion-dollar global industry, turning lawsuits into investments at the expense of societal good,” said Triple-I CEO Sean Kevelighan.
Kevelighan also said that it is “unconscionable” that plaintiffs can further exploit the legal system by “proactively seeking unassociated third parties to finance their lawsuits."
Triple-I’s report – What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability? – cites data from a Swiss Re analysis, which found that over half of the $17 billion in TPLF monies allocated worldwide in 2020 was spent in US hedge funds. The analysis also found that family offices – private wealth management advisory firms – are financing lawsuits that are brought by both individuals and businesses, and many have profited from the practice.
One of the issues contributing to the greater problem is the public’s lack of awareness when it comes to TPLF, Triple-I said. The institute cited another report from the Insurance Research Council, which found that nearly two out of five (39%) Americans indicated that they have never heard of litigation funding.
"The bulk of the concerns with third-party litigation funding stem from the opaque nature of the industry's practices, particularly the lack of disclosure as to whether outside funding is involved in a given case," Triple-I’s report stated. "Few US states or territories require attorneys or their clients to disclose TPLF agreements to the opposing side."
Triple-I also noted that the lack of transparency about a lawsuit’s funders has the potential to extend the lawsuit’s duration, subsequently increasing insurer legal and settlement costs. The report mentioned data from a 2021 Bloomberg Law survey, which found that more than half of attorneys (55%) have ethical concerns about using litigation funders.
"Third-party litigation funding agreements are rarely disclosed to the court or the litigants, and as such transparency is essential if the judicial process is to proceed in an orderly and cost-effective manner," Kevelighan stressed.
A previous report jointly released by Triple-I and the Casualty Actuarial Society estimated that social inflation – which refers to how insurers’ claims costs can rise above general economic inflation – increase claim payouts for commercial auto insurance liability alone by over $20 billion between 2010 and 2019. Said paper determined that costly jury monetary awards and state tort reform law rollbacks contributed to the trend.
"While the effects of TPLF, like other components of social inflation, remain challenging for insurers to quantify, understanding the risks remains crucial,” Triple-I’s new report concluded. “Disclosure of the involvement of TPLF in a legal claim can go a long way toward fairness, cost mitigation, and value for both sides of the litigation table.”