Disclosure of third-party litigation funding, which is routinely blamed for skyrocketing litigation defense costs and increased verdicts, could make the judicial system more efficient, advocates of disclosure regulations say.

Knowing that a lawsuit is funded could potentially streamline settlement negotiations because both the company’s insurer and the litigation financier will have better assessed the value of the claim, they say.

But supporters of third-party funding say the industry helps individuals and organizations fight much larger insurers and corporations and disclosure would not affect the outcome of suits. 

David Arick, president of the Risk & Insurance Management Society Inc. in New York, said that while plaintiffs can access a defendant’s insurance information, including limits purchased, and target an amount to pursue in a lawsuit, the same is not true for the company on the other side of the dispute. 

“We’d like to see disclosure occur so that you actually can identify who the parties of interest are in a piece of litigation,” he said.

Disclosing the existence and identity of a third-party financier could change a company’s strategy to resolve a suit, said Mr. Arick, who is also managing director, global risk management at Sedgwick Claims Management Services Inc.  

Third-party litigation funding companies have proliferated in the United States over the past decade (see related story).

Only Indiana, Montana, West Virginia and Wisconsin have laws requiring disclosure of whether a third party is financing a lawsuit. Florida and New Jersey recently rejected attempts to pass disclosure laws.

Disclosure and discovery are the simplest ways to help litigants and the courts, said Washington-based James Whittle, vice president and counsel for the American Property Casualty Insurance Association.

“More importantly, courts are a part of government, not a marketplace. We should know who’s involved and why. The courts need to know that to do their jobs,” he said.

Disclosure of litigation funding is necessary for the even-handed administration of justice, said Chicago-based insurance recovery attorney Scott M. Seaman, a partner at Hinshaw & Culbertson LLP.

The justification for allowing the disclosure of insurance coverage — enabling counsel for both sides to make the same realistic appraisal of the case — also applies to litigation funding, he said.

But Fiona Chaney, a senior investment manager at New York-based litigation financing company Omni Bridgeway Ltd., said the identity of a litigation funder is irrelevant and is protected by a nondisclosure agreement. 

“By and large, the vast majority of requests for disclosure don’t make it past the threshold test for relevance,” she said.

Even if a finding of potential relevance is made, that information between clients and funders is protected under the nondisclosure agreement, and courts routinely uphold the attorney work product doctrine — which protects some communications between lawyers and their clients — because the information is generated in anticipation of litigation, she said. 

Increased losses

Mr. Seaman said litigation financing has “effectuated at least a small sea level change in the U.S. civil litigation system” by increasing litigation timelines, increasing defense costs, increasing the potential for more and larger verdicts, and reducing the incentive for plaintiffs to settle. 

Those legal fees have led to higher liability losses for insurers (see chart). Higher claims costs can also reduce the availability of liability insurance and lead to higher uninsured legal liability risks for U.S. businesses, Mr. Seaman said.

Higher claims due to litigation funding can affect insurance costs, Mr. Whittle said. 

“Anything that’s going to negatively impact potential indemnity obligations is something that goes into the loss experience any insurer has. Loss costs are an elemental part of how insurance rates are determined,” Mr. Whittle said.

Litigation funding is becoming more prevalent in commercial trucking, intellectual property and mass torts litigation, he said. For example, litigation financiers invested roughly $2 billion in injury claims arising from contaminated drinking water at Camp Lejeune in Jacksonville, North Carolina, according to news reports. 

Insurance recovery attorney Scott D. Greenspan, a member of Sills Cummis & Gross P.C. in New York, who has worked closely with litigation funders in the past, said policyholders view third-party litigation financing as beneficial because it “levels the playing field” for litigation against insurers.

“From the policyholder’s perspective, it’s a fantastic tool because it allows cases to be brought against the insurance industry that their clients might not be able to fund,” he said.

“Some of the largest AMLaw 100 law firms charge more than $1,000 per hour for mid-level associates, and legal fees can skyrocket quickly, discouraging all but the biggest companies from bringing insurance coverage litigation. Conversely, insurers can secure discounted rates from law firms because they are volume buyers of legal services,” Mr. Greenspan said.

The potential for disclosure rules would not affect third-party litigation financing and the practice is on the rise in many types of commercial litigation, he said. 

Ms. Chaney said litigating funding is not “fueling” large verdicts because reputable financing companies do not ascribe a “nuclear value” to a potential case from an underwriting perspective, and court awards are often reduced by the trial judge or on appeal. 

“The most favorable outcome for a funder is a reasonable settlement on the merits of the litigation,” she said.

Mr. Whittle said that in addition to the rising litigation costs associated with the increased prevalence of litigation funding, there are growing national security concerns arising from foreign-based companies funding patent infringement suits against U.S. companies. 

Mr. Arick said RIMS’ public policy committee is making the growing issue of third-party litigation funding, especially from foreign entities, one of its legislative priorities.