Litigation funding blamed for spiking insurance settlements - but is that really true?
Critics of the role of litigation funding say it causes trials and other proceedings to run longer, raising the costs of litigation.
Editor’s Note: This is the first installment of a multi-part series examining the factors affecting the rise in nuclear verdicts across the insurance and legal industries, and is published in conjunction with our sister publications on ALM’s Law.com websites.
In some corners of the legal profession, litigation funding is viewed as a factor in the emergence of so-called nuclear settlements in civil litigation. But as is often the case when litigation funding is discussed, there’s not much middle ground.
Nuclear settlements have been defined as a large settlement based mainly on intangibles, like pain and suffering, rather than more concrete forms of damages, such as medical bills. And defense lawyers say nuclear settlements fit handily into their concept of social inflation, a term used to explain the high cost of civil litigation.
Critics of the role of litigation funding say it causes trials and other proceedings to run longer, raising the costs of litigation.
Is it really driving insurance costs?
John C.S. Pierce, who headed a social inflation task force for the DRI, sees a rise in nuclear settlements, particularly in places like Texas that are known for nuclear verdicts. And he sees no doubt that litigation funding plays a role in that trend.
“There is a tremendous influx of third-party money in the civil justice system. It’s an investment — it’s a $9 billion, $10 billion industry now,” he said of litigation funding. “So you have strangers to litigation coming into the litigation arena. And while that industry increases, I think we will see more of these big verdicts and I think we will see more big settlements,” said Pierce.
And litigation funding is contributing to social inflation because funders charge high interest rates, giving plaintiffs’ counsel less motivation to settle, Allen Kirsh and Scott Toland of Zurich Insurance wrote on a company blog.
“High fees and interest act as a disincentive to settle, as costs can easily outweigh settlements, leaving plaintiffs with little choice than to litigate. To make matters worse, third-party litigation funding is largely unregulated in most states, and funding agreements are confidential and lack transparency,” the Zurich article said.
But there are others who doubt the role of litigation funding is a major factor in rising verdicts and settlements.
Tom Baker, a professor at the University of Pennsylvania School of law who focuses on the insurance industry, expresses doubt about whether social inflation “is a real thing, as opposed to an effect of ordinary inflation, the insurance underwriting cycle, and prior tort reform.”
If one accepts that social inflation is a genuine phenomenon, “there is no solid evidence, and certainly no published, peer reviewed research, showing that litigation funding is the cause,” Baker wrote in an email.
The litigation funding market is too small to have the kind of impact on U.S. insurance costs that the insurance industry is asserting, Baker said.
Moreover, there has been no research showing that cases with “nuclear” recoveries were cases in which the lawyers employed third-party litigation funding, Baker wrote.
Citing a publication by insurance company Swiss Re, which said litigation funding is contributing to social inflation, Baker said that report focused on commercial trucking cases, but lawyers who bring those types of cases typically don’t use third-party litigation funding.
The Swiss Re report also said litigation funding contributes to higher awards, but plaintiffs often do not see the benefit of such increases. But that report was not published in an academic journal and was not subject to academic peer review, Baker said.
‘Nothing to do with each other’
Anthony Sebok, a professor at Cardozo School of Law who studies litigation finance, said there’s not enough information to tell if social inflation is really happening.
But as for whether litigation financing is a case of social inflation, “I can tell you there are so many reasons to think that the two have nothing to do with each other,” Sebok said.
Sebok said that rather than attributing social inflation to litigation funding, which he describes as a small phenomenon, one should ask “are there changes in attitude and American political culture such that corporate defendants are seeing an unexpected hostility to corporate defendants from parts of American society that people used to take for granted?”
“America has changed in the last 10 or 15 years at a very interesting way. There’s been a rise of populism,” Sebok said. “And what you get when you have populism is well established: We saw this in the early part of the 20th Century the United States. You get defendants losing more often than they thought they would, and being hit with higher verdicts than they thought they would, in parts of the country where they didn’t expect that to happen.”
“And you find judges who were picked by Republican governors and judges who picked by Republican presidents, not being as defense friendly as they were supposed to be,” Sebok added.
An important audience for the social inflation narrative is state lawmakers, said Sebok, who cited the recent enactment of a broad tort reform package in Florida.
Sebok said, “If I were trying to convince a Republican governor or convince a legislator about a package of reforms, I would give them a pamphlet about social inflation and say we need your help because we discovered social inflation out there, and it’s going to eat us all alive.”
Related:
Keeping verdicts from running away: Attorney Bob Tyson addresses nuclear verdicts