Insurers Are Covering Litigation Funders. Will It Catch On?

By Ganesh Setty

Insurers have started to cover losses from a third-party litigation funder's portfolio of plaintiff- side investments, experts tell Law360, calling into question the insurance industry's broader position that third-party litigation finance hikes carriers' litigation costs, thus requiring them to raise premiums for consumers.

But whether this effect, dubbed "social inflation," even exists is hotly debated in and of itself. Consumer advocates and third-party litigation funders maintain that social inflation is a mere hoax — a PR-manufactured term the insurance industry has used as a pretext to trigger a "hard market," or a market with rising rates. And third-party litigation finance, they say, merely helps plaintiffs level the playing field against large corporate defendants with far more resources at their disposal. …

Joanne Doroshow, executive director of the Center for Justice & Democracy and co-author of a 2020 study entitled "How the Cash Rich Insurance Industry Fakes Crises and Invents Social Inflation," told Law360 she believes insurers "know that social inflation doesn't exist."

To buy the notion that juries or plaintiff-side lawyers are causing insurers to have to raise rates, she said, one would also have to believe that juries started engineering large awards precisely at the end of each soft market, causing insurers to raise rates, and then suddenly stopped when markets actually hardened.

"It's ludicrous, and the data has never backed up the notion that claims have ever spiked," Doroshow said, further noting that third-party litigation funders already have their own sophisticated risk assessments to sort out the worthwhile cases from the frivolous ones.

"So, if you're saying that it's helping cases that are legitimate and should be successful — it's helping them be able to continue the litigation — then I don't see how that is something that is contributing to a system cost that shouldn't be paid here," she said. "These are legitimate cases."

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