In a recent report, Swiss Re has warned that third-party litigation finance (TPLF) is a major contributing factor to the trend of social inflation in the US, which is having a knock-on effect on the price and availability of many insurance covers.
Swiss Re notes that the US is the centre of the world’s TPLF industry, in which investors such as hedge funds and family offices finance legal action against companies.
More than half of the $17 billion investment into litigation funding globally in 2020 was deployed in the US.
Analysts at Swiss Re are concerned that TPLF represents an “expensive and blunt tool to enable legal disputes, with potentially harmful economic and ethical consequences,” and sees a need for greater protection for consumers, as well as well as better regulation of the industry.
Additionally, analysts argue that TPLF contributes to social inflation by incentivising litigants to initiate and prolong lawsuits.
Higher claims costs drive up insurance premiums, can reduce the availability of liability cover, and lead to higher uninsured legal liability risks for US businesses.
US casualty insurers in particular have incurred many years of underwriting losses linked to outsize legal awards and are being forced to raise premium rates.
Concerns about litigation funding centre on its effect on the length, cost and resolution of legal action, as longer cases increase claim costs, on average, due to higher legal expenses and compound interest on the litigation finance.
TPLF also diverts a greater share of legal awards to the funder rather than the plaintiff, and Swiss Re believes the process represents an “opaque, bottom-up wealth transfer from consumers to sophisticated investors and law firms.”
“We recommend stronger regulation of TPLF, including mandatory disclosure of funding arrangements and regulation of funding terms and conditions to protect plaintiffs and consumers,” Swiss Re’s report concluded.
“We also advocate cost-effective, efficient alternatives to TPLF such as legal aid and legal expense insurance, to target access to justice for those most in need.”
