North Carolina's move to become the first US state to ban third-party litigation funding (TPLF) is being hailed across the insurance industry as a landmark. But a senior claims leader is cautioning the market not to expect an overnight shift in claim costs.
Governor Josh Stein last week signed House Bill 315 into law, making it unlawful to finance civil litigation in the state in exchange for a financial stake tied to a case's outcome. The statute lets the state attorney general pursue injunctions and civil penalties of up to $50,000 per violation, and allows injured parties to recover treble damages.
For Gary Leonard (pictured), senior vice president of general liability claims at Gallagher Bassett, the real significance lies in how the law reframes a debate that until now has centered on transparency.
"It's really going to move the conversation from disclosure and transparency to a direct restriction on outside capital or funding in litigation," Leonard told Insurance Business.
“For insurers and business leaders, it matters because it could significantly impact litigation dynamics by reducing funding-driven pressure on claim severity. Most importantly, it could serve as a model for other states considering similar action.”
Leonard traced several years of rising claim costs in part to the expansion of litigation funding, which he said took off about six or seven years ago and has grown more impactful since.
Funders, he argued, push for "higher settlement demands because funders are seeking to maximize their return on investment." Cases that might otherwise resolve can stall when there isn't enough severity for a funder to recover its costs, dragging out timelines and lifting defense expenses for carriers and plaintiffs alike. Those dynamics, in his view, ultimately reach policyholders through higher premiums.
Asked whether a ban would translate into lower severity, Leonard said yes, “but it's likely to be gradual rather than immediate."
“If more states adopt the same approach, we could see reduced plaintiff leverage and fewer highly financed cases, which would result in less pressure on settlement values,” he explained.
“That said, claim severity is driven by a multitude of factors. The effect will really depend on how broadly these bans are adopted, and then we have to play the waiting game to see how plaintiff counsel adapts to the new rules.”
Leonard described the plaintiffs’ bar as "a very collaborative group" with "a strong network," and said he expects "pushback ... counterarguments and legislative efforts" rather than quiet acceptance.
North Carolina's prohibition goes further than measures elsewhere. The bill cleared the state House 112-0 and the Senate 45-1, and arrives as lawmakers in California, Colorado and Illinois weigh their own restrictions.
A string of states — among them Georgia, Montana, Indiana and Louisiana — have already enacted funder registration, disclosure or control limits.
Industry groups have rallied behind the law. In a statement, RIMS president Manny Padilla said: “North Carolina lawmakers have taken an important step toward addressing these concerns, and RIMS looks forward to building on this momentum as we continue to advance this legislative priority.
“Through the leadership of the RIMS Public Policy Committee and its Legislative Summit activities, the Society has long supported efforts to increase transparency and accountability in Third-Party Litigation Funding arrangements nationwide. We commend North Carolina’s leadership for having the foresight to restore balance and transparency in the State’s justice system.”
The Insurance Information Institute's Mark Friedlander earlier said the action "sends a clear message that the civil justice system is not an investment vehicle."
Litigation finance firms and many plaintiff attorneys see it differently, arguing the practice widens access to justice and that existing ethics rules and judicial oversight already provide adequate safeguards.
For Leonard, carriers' near-term focus should stay on disclosure, with funders still "hiding the ball" in some jurisdictions to avoid revealing their involvement. The biggest immediate win for the insurance industry is momentum: "It's about carriers, insurers, and insurance executives getting engaged and working together to continue making progress,” he said.
