Committee on Oversight and Accountability continues inquiry into third party litigation funding

The U.S. House of Representatives’ Committee on Oversight and Accountability continues an ongoing inquiry into how third-party litigation funding (TPLF) can undermine the interests of litigants amidst complaints from legal authorities and insurance organizations. 

Growing concerns over TPLF have emerged as a driver of rising insurance premiums. TPLF involves unaffiliated third parties financing lawsuits in exchange for a portion of any settlement, which has been shown to increase litigation costs and contribute to social inflation—ultimately affecting both insurers and policyholders.

In the high-profile PG&E settlement following the 2017 North Bay Fires and 2018 Camp Fire, it was found that the claimants’ attorney received financial backing from creditors with vested interests in the outcome. 

"At the end of the day, increases in pressure that bring up our premium are also those things. So we end up paying, our insurers end up paying, and so forth, and the money isn't allocated there to the risk as it should be," said Dr. Michel Léonard, Chief Economist at the Insurance Information Institute. 

Chief Justice John Roberts has been urged to address these concerns, as the Committee on Oversight and Accountability seeks to introduce nationwide disclosure requirements for TPLF agreements. “Without transparency measures in place, there is a strong risk of profit-driven investment funds, both foreign and domestic, directly influencing litigation proceedings with aims that may not be fully aligned with the interests of claimants,” the Committee’s letter stated.

Social inflation refers to the rising costs of insurance claims driven by factors such as increased litigation, larger jury awards, and more frequent claims, often influenced by aggressive legal practices. It goes beyond traditional economic inflation, affecting insurance premiums by escalating legal expenses and settlements.

TPLF is having an “outsized effect” on social inflation, according to the National Association of Insurance Commissioners. The practice results in higher premium costs for all insurance policyholders.

Social inflation in the U.S. reached 7% in 2023, the highest in 20 years, which is "driving large settlements" and increasing liability claim costs beyond economic inflation rates.

Swiss RE reports that spending on legal advertising rose by 34% over the past decade, with the number of advertisements nearly doubling. In 2023, legal services advertising approached USD 1.2 billion. This aggressive marketing, including extensive use of digital media and psychology-based strategies, fuels the volume of litigation by encouraging more individuals to file lawsuits, often leading to higher settlement costs.