Why Are Hedge Funds Financing Insurance Lawsuits? | Insurify

Policyholders who have a disagreement with their insurance company that they couldn't settle through arbitration have long had the option to sue. But the time and expense of a lawsuit can make legal action cost-prohibitive.

Enter the late-night TV ads inviting viewers to "Get cash now for your lawsuit." The outside parties in the ads say they're willing to "loan" the necessary money for a potential lawsuit, at no risk to the policyholder. Win the case, and the lender gets a cut of the settlement — sometimes a big one. Lose, and nothing happens.

It's called "third-party litigation funding" (TPLF), and it may seem like a good deal for consumers. But multiple states have enacted legislation to regulate TPLF. And as of June, North Carolina has outright banned outside investors from funding lawsuits. More states could follow suit.

Why are states against outside-funded lawsuits?

Insurer complaints and public SEC filings show many of these litigation funders are hedge funds, specialty finance firms, and investment vehicles. They're part of a new multibillion-dollar industry that insurers say is driving up costs for everyone through higher premiums. Some insurers even allege these lawsuit funders aren't just indirect cost drivers — they're targeting insurance companies directly.

The business is known as "nonrecourse litigation funding." The insurance industry calls it "legal system abuse," claiming that lawsuits have become investment vehicles rather than a means of resolving disputes.

A simple bet

The TPLF business is built around a simple bet: advance a claimant a modest sum, let the case balloon into a much heftier demand, then package the resulting receivables and sell them to investors.

But insurers are fighting back. New York Marine & General Insurance recently sued Case Cash Funding LLC, alleging a single deal bundled nearly 17,000 of these advances into a package worth more than $84 million. Investors buying in weren't just betting on random lawsuits, the insurer alleged. They were told exactly which insurance companies would end up paying, ranked by how financially strong each insurer was.

To some, such processes seem less like access to justice and more like a bet on the insurance company's balance sheet, and that's exactly the concern driving the new state laws.

TPLF funders in states like Ohio and Texas have argued that the money they provide isn't a loan at all, but rather a legal purchase of an asset, a stake in the case's outcome. It's an important difference because loans are subject to interest-rate caps, while funding agreements generally aren't and thus are exempt from regulation.

Insurers say TPLFs hurt consumers

New York Marine's suit alleged the litigation funder, Case Cash Funding, wasn't just helping injured claimants. It was specifically targeting insurers as the real source of payment. With an outside investor expecting a return, insurers say cases drag on longer, demands grow, and settlements that would've been reasonable are rejected in favor of holding out for more.

The more insurance companies pay out in these alleged inflated settlements, the more premiums for home, auto, and health insurance will likely rise.

The complaint alleges, among other things, that Case Cash Funding:

Referred claimants to particular medical providersMaintained relationships with plaintiff attorneys through interest-free "personal loans"Encouraged surgeries because larger medical bills increased case valueExercised control over settlement negotiationsForced cases that otherwise would have settled to continue into costly litigation

Insurers call this trend "social inflation." And they say it's one of the reasons consumer auto and liability insurance premiums keep climbing.

States enter the fray

In June, North Carolina became the first state to ban third-party lawsuit funding entirely. The law makes it illegal for outside investors to fund a lawsuit in exchange for a cut of the outcome — though it still allows traditional attorney contingency fees, family financial help, and nonprofit legal aid.

The bill passed with little opposition in either chamber of the legislature. Insurance industry groups celebrated it as a long-overdue fix.

Yet most states are taking a lighter touch than North Carolina. Instead of banning litigation funding outright, they're requiring more transparency about who's really behind a lawsuit.

States with restrictions in place have provisions that include:

Making funders register with state regulatorsRequiring funding agreements to be disclosed during a lawsuitCapping how much of a settlement a funder can takeBlocking funders from picking the lawyers or steering the case

Georgia, for example, now requires litigation funders to register with the state and report who's really behind the money — including any foreign ties. The New York Legislature capped the amount litigation funders can get from a lawsuit, allowing them just 25% of gross settlement proceeds, even if they invested more than that.

Ohio enacted its law specifically to prevent foreign actors from using lawsuits as leverage against Ohio businesses. Missouri has gone even further, proposing felony charges for anyone caught secretly funneling foreign money into a lawsuit through a middleman.

Proponents say banning TPLFs hinders those who can't afford justice

But as states step up legislation against TPLFs, others are voicing concerns.

Many plaintiff attorneys are defenders of the practice — but they're not alone. The litigation funders themselves argue they're providing a legitimate financial service, not running a scam. They point out that companies — not just individuals — sometimes rely on litigation funding as well, especially smaller businesses that need help affording a lawsuit against a much bigger, better-funded opponent.

Proponents say that without funding, many people and smaller companies simply couldn't afford to sue at all — no matter how legitimate their case. Ban the funding, and you don't just get rid of bad lawsuits. You get rid of good ones, too, especially those from people who can't pay a lawyer out of pocket, they say.

In an op-ed in the Daily Report, attorney Fred A. Cunningham said banning or heavily regulating third-party litigation funding could have unintended consequences.

"Whatever position someone takes on litigation funding, the conversation should begin with a simple question: What happens to people with legitimate claims who cannot afford to see their cases through?" asks Cunningham. "If we don't answer that honestly, we risk making access to justice depend less on the facts of a case than on the financial resources of the person bringing it."

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