Triple I: Investors Fund Lawsuits without Disclosing Their Role

Investors with no stake in a lawsuit beyond wanting to profit from its outcome are contributing to the growth of insurer legal costs and settlement payouts, according to a new report from the Insurance Information Institute (Triple-I).

Source: I.I.I. | Published on July 29, 2022

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“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 Sean Kevelighan, CEO, Triple-I. “It is unconscionable that plaintiffs are able to further exploit the legal system by proactively seeking unassociated third parties to finance their lawsuits.”

Triple-I’s report notes a Swiss Re analysis found more than half of the $17 billion in TPLF monies allocated worldwide in 2020 were spent in the U.S. Hedge funds and family offices (private wealth management advisory firms) are financing lawsuits brought by either individuals or businesses and many have profited by doing so.

Millions of people are unaware of the TPLF industry, with nearly two of five (39 percent) Americans surveyed as part of a national poll saying they’d never heard of the term ‘litigation funding,’ the Insurance Research Council (IRC) revealed last month.

“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,” states Triple-I’s report, What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability?. “Few U.S. states or territories require attorneys or their clients to disclose TPLF agreements to the opposing side.”

The lack of transparency about a lawsuit’s funders has the potential to extend the lawsuit’s duration and to increase insurer legal and settlement costs, Triple-I’s report states. Indeed, more than half of attorneys (55 percent) have ethical concerns about using litigation funders, the Triple-I report adds, citing a September 2021 Bloomberg Law survey.

“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 stated.

Social inflation, the term used to describe how insurers’ claims costs can rise above general economic inflation, increased claim payouts for commercial auto insurance liability alone by over $20 billion between 2010 and 2019, a paper released jointly this year by Triple-I and the Casualty Actuarial Society estimated. Costly jury monetary awards and state tort reform law rollbacks have contributed to this trend, that paper found.

“While the effects of TPLF, like other components of social inflation, remain challenging for insurers to quantify, understanding the risks remains crucial. 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,” Triple-I’s just-released report states.