Consulting and research firm Sedgwick reported on May 31 that the practice of third-party litigation funding (TPLF) continues to grow due to a lack of regulation. The report found that TPLF has raised concerns about the amount of compensation plaintiffs receive, foreign entities' involvement in U.S. lawsuits, the incentivization of "frivolous" or meritless lawsuits, and the rise of social inflation.
According to the report, third-party financiers invested more than $3.2 billion in court cases in 2022, representing a 16% increase from 2021. Legislators have begun to scrutinize TPLF due to concerns about national security risks and ethical implications. Foreign entities could exert influence over the U.S. judicial system by funding lawsuits, and sanctioned entities can interact with financial markets and gain exposure to intellectual property that might otherwise be sealed in court records.
The report states that TPLF leads to larger verdict amounts but reduces the plaintiff’s net award when a third-party funder is involved in the case. Ethical concerns include the incentivization of "frivolous lawsuits or those lacking serious merits," since plaintiffs are free from the financial risk of bringing meritless lawsuits and can pursue "lengthy and expensive litigation" rather than choosing to settle.
Sedgwick's report also highlights that TPLF contributes to social inflation, meaning the cost of insurance claims is outpacing general economic inflation, driving insurance costs up for policyholders. Excessive litigation creates a hidden "tort tax" that costs every American household $3,621 annually. A survey reported by the American Property Casualty Insurance Association found that 65% of respondents were not aware of "the impact that plaintiffs' bar tactics have on their household costs," while 59% were not familiar with TPLF practices. Additionally, 88% said there should be transparency around all parties with financial stakes in a lawsuit.
According to a legal alert from Barnes & Thornburg LLP, the Supreme Court of New Jersey’s Civil Practice Committee recently rejected a proposed rule that would have required the disclosure of TPLF in civil actions in New Jersey’s Superior Court as part of routine discovery. The New Jersey Civil Justice Institute, a nonprofit coalition of major employers and organizations, proposed the rule due to concerns that TPLF can prolong litigation and influence resolutions. The Committee stated it lacks "sufficient experience to meaningfully develop a rule change at this time" and noted that "drafting a rule may prove difficult."
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