The Expert Podcast

There's a process in the legal industry called litigation financing. This means financial institutions will invest money into a court case with the prospect of profiting later if the party they back wins the case. If the backed party secures a favorable judgment, these institutions receive a portion of the windfall. For example, you might be suing someone for personal injury, a contract dispute, or another matter but lack the funds to support the lawsuit. Perhaps your law firm is unable or unwilling to work on contingency, or they might think your case is good but are reluctant to invest the hundreds of thousands of dollars needed to proceed.

In such scenarios, third parties step in to fund the case. They cover attorney fees, expert witnesses, evidence discovery, and even private investigators. In return, they require a contract stating that if you win, they get a predetermined amount back. It's similar to a contingency agreement but is handled by a third party, not the attorney.

Is this practice good or bad? According to an article from Property and Casualty—an insurance industry publication—their perspective is that it turns the civil justice system into a "casino." They argue it generates frivolous lawsuits, driving up litigation expenses solely to repay hedge funds that invest in these cases. One significant consequence is rising commercial insurance costs. These costs can make coverage unaffordable or even unavailable for businesses seeking insurance.

This issue ties into what the insurance industry calls "social inflation," which includes rising costs from increased litigation, larger jury awards, and broader liability definitions. For plaintiffs who win their cases, litigation financing can be a boon. For example, in a recent case involving Ford F-250 trucks, a plaintiff was awarded $1.7 billion in punitive damages due to roof crush issues during rollovers. While this is a legitimate victory, the question arises: does third-party litigation financing unnecessarily inflate litigation costs for defendants?

Defendants—and their insurers—often bear these inflated costs. Sometimes, plaintiffs with ample financial backing will over-litigate, hiring numerous expert witnesses or filing excessive motions, which can make it difficult for defendants to afford a proper defense. This may force settlements or weaken their ability to counter the plaintiff's case effectively.

The ripple effect of rising litigation costs impacts consumers as well. Even companies that are never sued must factor in potential liabilities and higher insurance premiums. These increased costs are often passed on to consumers through higher prices for goods and services. This dynamic contributes to overall inflation, as businesses adjust their pricing to account for the cost of protecting themselves from litigation.

Insurance companies, however, rarely lose in the long term. They recoup their payouts by adjusting future premiums based on past losses. This ensures their profitability, but the costs ultimately trickle down to customers. Businesses, in turn, include these higher insurance expenses in their pricing, indirectly affecting consumers.

Let us know in the comments what you think about the rise of litigation financing and its impact on the marketplace, the insurance industry, and businesses. As a consumer, you might not notice its effects directly, but it could be one reason behind price increases. Share your opinions, whether positive or negative, and thank you for watching.