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Matt Brady

Matt Brady
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Lisa Floreancig

Lisa Floreancig
Public Affairs Director
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Telephone: 317.876.4246

Insurance Premiums Could Rise as Result of Litigation Funding, Says NAMIC

According to a new public policy paper released today by the National Association of Mutual Insurance Companies (NAMIC), insurance premiums could rise as a result of litigation funding, a practice that involves providing money to a party to pursue a potential or filed lawsuit in return for a share of any damages award or settlement. The paper, “Third-Party Litigation Funding: Tipping the Scales of Justice for Profit,” critically examines the business of litigation funding, describes various forms of third-party litigation funding, and analyzes its effect on attorneys, plaintiffs, defendants, insurers, and the civil litigation system as a whole.

Litigation funding is relatively new to the U.S., having its origins in Australia and the U.K, but it is rapidly becoming a cottage industry in this country and, according the NAMIC paper, “has the potential to radically change the legal landscape and the civil justice system in ways that are mostly negative.”

“It stands to reason that third-party funding will increase the volume of litigation, and will especially encourage the filing of frivolous and ‘nuisance’ lawsuits,” said Robert Detlefsen, Ph.D., NAMIC’s vice president of public policy. “This will increase insurers’ litigation defense costs, which will ultimately cause premiums to rise.” The paper also explores the broader implications of litigation funding and finds that “its most profound impact may be seen in its eventual shaping of the litigation process and the law itself.”

The paper notes that litigation funding is largely unregulated in the U.S., and that efforts are underway in several state legislatures to apply “soft-touch” rules to the practice that in most instances have been proposed by the litigation funding industry itself. The paper concludes, however, that “sufficient grounds exist for enacting a blanket prohibition against the practice of third-party litigation funding.” Failing that, the paper encourages policymakers to consider tougher forms of regulation that would limit litigation funding’s most harmful legal and economic effects. The paper recommends several specific provisions to be included in any legislation intended to regulate litigation funding. For example:

  • Third-party funding should not be allowed in class action settings or to finance mass tort litigation;
  • The amount that can be taken as loan repayment from the net recovery should be limited to a percentage of the net recovery;

  • Attorneys should not be allowed to have financial interest in a litigation funding company; and
  • Litigation funding companies should not be allowed to exert influence over the plaintiff’s decision to settle or to otherwise direct the course of the litigation.

“Toothless legislation that does little more than create the illusion that litigation funding is a regulated industry may be worse than no regulation at all,” the NAMIC paper asserts. “It will mainly serve to codify the legitimacy of a practice that poses a direct threat to the integrity of the civil justice system.”

Contact: Lisa Floreancig
Director of Communications
State & Policy Affairs
National Association of Mutual Insurance Companies

Posted: Thursday, June 09, 2011 5:10:10 PM. Modified: Thursday, June 09, 2011 5:10:42 PM.

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