A Piecemeal Approach Toward Transparency In Litigation Finance
A U.S. District Court judge in Delaware made his courtroom the latest jurisdiction to require lawsuit participants to disclose whether third-party investors have any stake in litigation being brought before him.
While this is a step toward greater transparency with regard to third-party litigation funding, the standing order by Chief Judge Colm F. Connolly only affects cases in his court. The other three district court judges in Delaware have not issued similar decrees. But the order was made in an extremely influential district. More than half of publicly traded U.S. corporations are incorporated in Delaware, and the state’s laws often govern contracts between businesses.
A booming global industry
Funding of lawsuits by international hedge funds and other financial third parties – with no stake in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg.
Third-party litigation funding was once widely prohibited. As bans have been eroded in recent decades, it has grown, spread, and become a contributor to “social inflation”: increased insurance payouts and loss ratios beyond what can be explained by economic inflation alone.
Efforts at transparency
Some progress in toward greater transparency has been made in recent years. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019.
At the federal level, the Litigation Funding Transparency Act was introduced and referred to the Senate Judiciary Committee in October 2021.
Panelists at Triple-I’s Joint Industry Forum in December 2021 agreed on the importance of requiring disclosure of litigation funding. Insurance groups and the U.S. Chamber of Commerce say litigation funding needs more rules to prevent abuses of the legal system and to protect consumers, who often pay exorbitant interest rates on money they borrow to pay legal expenses.
“By its very nature, third-party litigation financing promotes speculative litigation and increases costs for everyone,” said Stef Zielezienski, executive vice president and chief legal officer for the American Property Casualty Insurance Association in a press release about the Delaware order. “At its worst, outside investment in litigation financing dependent on a successful verdict creates incentives to prolong litigation.”
The Delaware judge’s order requires, in addition to disclosing the name and address of any third-party funder, that parties to any case before his bench must also disclose whether approval by the funder is necessary for settlement decisions and, if so, the terms and conditions relating to that approval.
While strides like this may be small, they add up in the fight to make disclosure of third-party litigation financing a priority in states and in courthouses nationwide.
Learn More:
Social Inflation: What It Is and Why It Matters
Triple-I, CAS Quantify Social Inflation’s Impact on Commercial Auto
What Is Social Inflation and What Can Insurers Do About It?
IRC Study: Social Inflation Is Real, and It Hurts Consumers, Businesses
