Indiana is the latest state to require disclosure of third-party litigation funding in civil claims.
The law, signed into law by Gov. Eric Holcomb on April 20, requires that every party in a civil proceeding and every insurer required to defend a party in court be notified of a litigation funding agreement before the proceeding begins.
The US Government Accountability Office defines third-party litigation funding as “an arrangement whereby a funder who is not a party to the litigation agrees to assist in the funding.” Multi-billion dollar global investment firms have made third-party litigation funding their sole or primary business and are experiencing strong growth.
Because the market lacks transparency, estimates of its size can vary, but according to Swiss Re, more than half of the $17 billion invested in litigation funding globally in 2020 was deployed in the United States. Swiss Re estimates the market will grow to as much as $30 billion by 2028. At the same time, the affordability of insurance coverage – particularly for commercial auto products – is under threat from rising litigation and claims costs.
Several states have preceded Indiana in increasing transparency regarding third-party funding of litigation. In 2018, New York enacted legislation adding Section 489 to the New York City Judiciary Act. This law requires the disclosure of litigation funding arrangements in class actions and certain collective settlements. That same year, Wisconsin introduced a statute requiring disclosure of litigation funding procedures. West Virginia followed suit in 2019.
In 2021, the U.S. District Court for the District of New Jersey changed its rules to require third-party litigation funding disclosures in court cases. The Northern District of California enacted a similar rule for class, mass, and collective actions across the district in 2017.
In 2022, Illinois passed the Consumer Legal Funding Act (SB 1099), which enacted several statutes regulating aspects of third-party litigation funding, but does not address the disclosure of those arrangements or information about the existence of a funding arrangement to defendants in claims for damages.
Litigation funding not only drives up costs—it brings motives to the court process beyond achieving fair outcomes. For this reason, the practice was once largely banned in the United States. As these prohibitions have been eroded in recent decades, litigation funding has grown, expanded, and morphed into forms that can cost plaintiffs more in interest than they might otherwise gain from a settlement. In fact, it can lead to lengthy legal battles to the detriment of everyone involved — except for the financiers and the plaintiffs’ attorneys. Top of shape
The National Association of Mutual Insurance Companies (NAMIC) welcomed Indiana’s move.
“Litigation finance is a multi-billion dollar industry that has for years propelled the length and cost of civil litigation,” said Neil Alldredge, President and Chief Executive Officer of NAMIC. “While much more needs to be done to address this issue, this law represents an important step forward.”
Disclosing third-party litigation funding before litigation begins “will help prevent opportunistic investors from prioritizing return on investment over customer interests and siphoning customer value from policyholders, claimants and insurers,” Alldredge said.
What is third-party litigation funding and how does it affect insurance pricing and affordability?
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