Litigation funding could help consumers in court
Insurance | Legal
When it comes to lawsuits, a new industry is growing to help fund consumer and commercial litigation.
Litigation funding companies (LFCs) act as third parties to fund consumer and commercial litigation through non-recourse lending or by accepting legal assets as collateral, according to the Swiss Re Institute, which studies and assesses the reinsurance risk. Swiss Re asserts that CFLs support many types of commercial and consumer claims relating to, among other things, trucking accidents, personal injury, product liability and medical liability, with an emphasis on consumers in personal injury cases.
While consumers will always need a lawyer to take their case to lenders for review, Forbes reports that securing the funds means you and your lawyer may no longer have to face lenders alone. ‘assurance. Of course, some law firms will prefer to use their own resources instead.
Forbes reports that the litigation funding industry – centered in the United States and backed by Wall Street hedge funds – is growing.
Not surprisingly, some are against the use of litigation funds. Bailey Aragorn of the American Tort Reform Association told Forbes, “Litigation funding bloats settlements and devalues our civil justice system by allowing secret parties to have a stake in litigation.” The association is a national network of state coalition organizations for legal reform.
In June, while commending the U.S. District Court for the District of New Jersey for passing a rule requiring parties involved in litigation to disclose information and the financial interests of non-parties, the American Property Casualty Insurance Association said, “Allowing investors to turn the civil justice system into a profit-driven commodity market is egregious.
“Third-party litigation funding is booming, with more than $13 billion in invested capital globally. This should concern everyone, especially when this funding happens far from public view and scrutiny, designed with rate of return in mind rather than fairness and equity.
Along with New Jersey, the legislatures of Wisconsin and West Virginia as well as the U.S. District Court for the Northern District of California require disclosure of litigation funding agreements. State courts in Colorado and North Carolina have found that litigation funding may violate usury laws, according to Swiss Re.
But Forbes warns consumers to only use litigation funding after asking questions about the reputation of the funder and whether the funder will have another role in the case besides providing the money. For example, the funder American Legal Finance Association has a code that prevents its members from interfering or participating in their client’s litigation. It is also important to ask in advance what the lender’s fees are, which can be negotiated as well as the interest rate, and to fully understand the contract before signing it.
Consumer rights advocates, including the Center for Economic & Social Justice and the Consumer Federation of America, consider lenders a “welcome ally in the battle against the trillion-dollar insurance industry,” according to Forbes.
Investments in third-party litigation funding (TPLF) rose 16% globally last year to $17 billion, according to a December report from the Swiss Re Institute. Swiss Re said it believes TPLF could have “potentially adverse economic and ethical consequences”.
“We view the TPLF as a contributor to social inflation in the United States, by inducing litigants to initiate and prolong lawsuits. Higher claims costs drive up insurance premiums, can reduce the availability of liability coverage, and lead to higher uninsured liability risks for US businesses. These costs are ultimately paid for by consumers.
After the seventh straight year of underwriting losses, insurers are raising premium rates, limiting policy coverages and, in some cases, exiting the market altogether, according to Swiss Re.
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“Large Legal Damages Awarded to Plaintiffs Lead to Escalating Insurance Claim Losses for Defendants’ Insurers” (From the Swiss Re Institute “US Litigation Funding and Social Inflation: The Rising Costs of legal liability”, December 2021 report)