Indiana has become the latest state to require disclosure of third-party litigation funding in civil lawsuits.
The legislation — which was signed into law by Governor Eric Holcomb on April 20 — requires that every party to a civil action and every insurance company that has a duty to defend a party in court be notified of any litigation financing agreement before the case begins.
The US Government Accountability Office defines third-party litigation funding as “an arrangement whereby a funder who is not a party to a lawsuit agrees to help fund it.” Multi-billion dollar global investment firms have made third party litigation fund their sole or core business and are experiencing strong growth.
Because the market lacks transparency, estimates of its size can vary, but according to Swiss Re, more than half of the $17 billion invested in litigation funding globally in 2020 was deployed in the US. Swiss Re estimates that the market will reach $30 billion by 2028. At the same time, the affordability of insurance coverage – especially for commercial auto products – is threatened by increases in litigation and claims costs.
Several states have preceded Indiana in seeking to increase transparency around third-party litigation funding. In 2018, New York enacted legislation that added Section 489 to the New York Judiciary Code. This law mandates disclosure of litigation funding agreements in class action and some total settlement cases. That same year, the state of Wisconsin instituted a legal provision requiring disclosure of litigation funding arrangements. West Virginia followed suit in 2019.
In 2021, the US District Court for the District of New Jersey amended its rules to require disclosure of third-party litigation funding in court cases. The Northern District of California imposed a similar rule in 2017 for class, class, and group actions across the district.
In 2022, Illinois passed the Consumer Statutory Finance Act (SB 1099), which implemented several legal provisions regulating aspects of third-party litigation financing, but does not address disclosure of such arrangements or information about the existence of a financing arrangement to defendants as part of a litigation proceeding.
Litigation funding not only increases costs – it introduces incentives beyond fair outcomes into the judicial process. This is why this practice was widely banned in the United States. As that prohibition has eroded in recent decades, litigation funding has grown, spread, and morphed into forms that can cost plaintiffs more interest than they would earn in a settlement. In fact, it can encourage prolonged litigation to the detriment of everyone involved—except for the financiers and the plaintiff’s attorney.
The National Association of Mutual Insurance Companies (NAMIC) applauded Indiana’s move.
“Litigation finance is a multi-billion dollar industry that for years has increased the length and cost of civil cases,” said Neil Aldredge, President and CEO of NAMIC. “While much more needs to be done to address this problem, this law represents an important advance.”
Aldredge said disclosure of third-party litigation funding before a lawsuit begins “will help discourage opportunistic investors from enhancing return on investment on client interests and sucking value out of clients away from policyholders, claimants, and insurers.”
Learn more:
What is third party litigation financing and how does it affect insurance rates and affordability?
A US study of third-party litigation financing notes a growing market and a dearth of transparency
The IRC Study: Public Perceptions of the Impact of Litigation on Auto Insurance Claims
Litigation finance law lacks transparency
A fragmented approach toward transparency in litigation financing
Lawyers group agrees best practices for guiding litigation funding
