According to Swiss Re, the United States is the epicenter of the world's TPLF industry, in which investors such as hedge funds and family offices finance legal action against corporations.
More than half of the $17 billion invested in litigation funding globally in 2020 will be spent in the United States.
Swiss Re analysts are concerned that the TPLF is a "expensive and blunt tool to enable legal disputes, with potentially harmful economic and ethical consequences," and see a need for greater consumer protection as well as better industry regulation.
Furthermore, analysts contend that the TPLF contributes to social inflation by incentivizing litigants to file and pursue lawsuits.
Higher claims costs raise insurance premiums, reduce the availability of liability coverage, and increase uninsured legal liability risks for US businesses.
Casualty insurers in the United States, in particular, have incurred years of underwriting losses as a result of exorbitant legal awards, forcing them to raise premium rates.
Concerns about litigation funding revolve around its impact on the length, cost, and resolution of legal action, as longer cases increase claim costs on average due to higher legal expenses and compound interest on litigation finance.
TPLF also shifts a larger portion of legal awards to the funder rather than the plaintiff, and Swiss Re sees the process as a "opaque, bottom-up wealth transfer from consumers to sophisticated investors and law firms."
"To protect plaintiffs and consumers, we recommend stronger regulation of TPLF, including mandatory disclosure of funding arrangements and regulation of funding terms and conditions," Swiss Re concluded in its report.
"We also advocate for cost-effective, efficient alternatives to TPLF, such as legal aid and legal expense insurance, in order to target access to justice for those in greatest need."