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How Litigation Funding Firms Are Making Social Inflation Worse

As litigation funding becomes more common in general liability litigation, rising claims costs are impacting the casualty market.
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how litigation funding firms are making social inflation worse

In 2022, investments by companies that finance U.S. commercial lawsuits in exchange for a percentage of recoveries increased to $3.2 billion. This capital investment by third-party finance litigation (TPFL) firms represents a 16% increase from 2021 and marks the largest capital investment increase in the past three years, according to a report by Westfleet Advisors.

Why is the increase in litigation funding a concern for the insurance industry? The answer: social inflation.

Defined by the Insurance Information Institute, social inflation “refers to the trend of rising insurance costs due to increased litigation, plaintiff-friendly judgments, and higher jury awards." These judgments and awards are impacting the insurance industry, with some industry leaders stating that social inflation has contributed to general liability and medical malpractice lines, in particular, experiencing seven consecutive years of underwriting losses, according to a report by Swiss Re.

“Litigation funding has had a heavy presence in commercial and class action litigation for years, but we are now seeing it more regularly in general liability litigation," says Matt Huels, executive underwriting officer, small commercial, Markel. “Litigation funding is being marketed to a much broader investment audience, which has resulted in a larger pool of capital available to attorneys and plaintiffs pursuing general liability claims."

Currently, rates in the general liability market are continuing to be impacted by “persistent loss cost trends and loss volatility introduced by nuclear verdicts—particularly in the umbrella and excess marketplace," says John Sakakeeny, head of general liability, umbrella, excess product lines, The Hartford.

“Severity is driven by an overall increase in the cost of goods sold and supply chain issues on the property damage side, while on the bodily injury damage side, medical costs, rising wages—lost wages and economic claims—and jury outcomes are driving the trend," he says. 

“Rising claims costs continue to drive pricing," says Adam Mazan, vice president, Pacific region, Risk Placement Services (RPS). “Increasing medical costs and construction costs continue to push up loss costs, which in turn is passed back to buyers through rates," he added.

Rising loss costs are impacting the casualty marketplace, and nuclear verdicts will continue," says Bill Wilkinson, president, national casualty, RPS. “Habitational accounts are seeing constant changes in underwriting guidelines, steep increases in rates and retentions along with more coverage limitations. Bars, restaurants and tavern business liability can be challenging as well." 

“Claims severity across the board is up," Huels agrees, pointing to the confluence of TPFL and several societal trends leading to higher verdicts in favor of plaintiffs, such as “a decade of rising costs and stagnating wages, skyrocketing health care spending, a polarized political climate and a pervasive media culture."

Further, consumer advocates welcome litigation funding as an ally for consumers in the fight for the little guy against corporate America. “As a result, social inflation has reached a scale that is significantly impacting claims and results; and there is no relief in sight," Huels says. 

“In the past, such [nuclear] results were typically limited to litigation involving vulnerable portions of our society—children, for example—we are now seeing nuclear verdicts across a broader spectrum of classes and industries," Huels continues. “Compounding this phenomenon is additional exposure to extra-contractual penalties, which are forcing larger settlements that exceed the historical scope of claim valuation." 

“Third-party litigation adds a layer of profit and revenue stream to outside sources from insurance dollars," Mazan explains. “The plaintiffs' bar continues to take a more sophisticated approach to litigating claims and plays on emotions to drive higher settlements." 

There's currently no regulation of litigation funding firms, although experts see those measures as critical to addressing rising verdicts. “Some progress is being made at a state level to require TPFL's disclosures, or transparency, in certain jurisdictions," Sakakeeny notes. 

“Just as importantly, carriers can make a focused effort to investigate the presence of litigation funding in a given case and to address the impacts it is having on the value of claims," Huels says. “Counter actions that can be considered include focused written and oral discovery into the presence and terms of funding, and pressing courts to allow evidence of funding to be presented to the fact finderjudge or juryso that it is considered during trial." 

Olivia Overman is IA content editor.

Monday, June 12, 2023
General Liability
Big I Markets