Curbing a Questionable Practice: A Survey of Public Policy Measures to Address Concerns Surrounding Litigation Funding

Litigation funding has developed into a significant public policy issue of concern for insurers and others affected by litigation over the past twenty years. The issue initially came to the attention of NAMIC when legislative action in a number of states established a regulatory framework for the practice. Litigation funding typically involves a lender or litigation finance company providing funds to a plaintiff in a lawsuit in exchange for the right to collect proceeds when the plaintiff obtains a settlement or judgment in the case. This contractual obligation potentially injects a different dynamic over the traditional two-party attorney/ client representation. Further, the returns to the litigation finance company when the plaintiff recovers are many times higher than is permissible in traditional lending because of exorbitant interest rates charged on the loan.

The first round of legislation in this arena afforded only meager consumer protections, such as requiring funding agreements to be in writing. These laws did not address interest rates, despite the fact litigation lenders charged rates that would be considered excessive under any state lending law. And they did not provide for disclosure of the funding agreements to the courts or other parties.

It was the litigation funding industry that pushed for limiting consumer protections with the apparent goal of avoiding meaningful regulation while establishing in state law the legitimacy of a business practice that was being increasingly questioned. The resulting loose regulatory structure has led to an influx of investors, hedge funds, and other entities with high volumes of cash seeking higher returns, resulting in an estimated litigation lending market between $50 billion and $100 billion.

As this litigation investment activity has expanded there has also been a concomitant rise in the number of plaintiff horror stories. In one example, a plaintiff borrowed $5,000 to support himself during litigation and then had to pay back $7,500 four months later from a recovery, an interest rate of more than 50 percent. Another litigant borrowed $12,000 from a litigation lending company and was forced to pay back an additional $11,000 in fees less than a year later, nearly 100 percent interest.

In NAMIC’s view, litigation funding as it has developed and is currently practiced is a pernicious enterprise that distorts and possibly expands litigation while taking advantage of vulnerable consumers. Therefore, significant reforms, including interest rate limitations and requirements to disclose the existence of litigation lending to all litigants and the court, are imperative, while an outright prohibition of the practice should be considered.

Armed with a better understanding of the legal landscape, NAMIC and other organizations have worked to seek and secure meaningful public policy measures aimed at better understanding and ultimately curbing the problems associated with litigation funding. However, there is much work left to be done. The purpose of this paper is to better understand the remaining challenges and opportunities by surveying some of the recent public policy developments across the country in the litigation funding space.