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Litigation Funding Creates Substantial Cost Risk For Insurers

Third-party litigation funding is a burgeoning industry that threatens to increase the volume of litigation and drive up litigation-defense and claim costs. The NAMIC argues the practice should be prohibited.

By Robert Detlefsen | Updated on July 21, 2011

Since medieval times, jurists have condemned “champerty,” the practice of giving money to potential litigants to file and maintain lawsuits in return for a share of the proceeds. But in recent years, opposition to champerty has weakened, opening the door to third-party litigation funding, a burgeoning industry that threatens to increase the volume of litigation and drive up litigation-defense and claim costs. P&C insurers should take careful note of this development.

Third-party litigation funding takes several forms. In the most common example, a funding company provides thousands of dollars to a personal-injury plaintiff and charges interest at annualized rates that can exceed 100 percent of the loan value. These “loans” are generally not subject to state usury laws because they are made on a non-recourse basis: If the plaintiff loses, the funder has no claim for repayment.

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