Author, Sam Brown, Vice President, Human Services Group, Rancho Mesa Insurance Services, Inc.

The first quarter of 2024 is in full swing and the insurance industry is already feeling the rising cost of insurance claims, often referred to as social inflation. Commonly discussed reasons for social inflation include socioeconomic, legal, and behavioral trends that produce costly lawsuits, according to research conducted by The Institutes. In addition to these familiar observations, a relatively new factor is now playing a role in large lawsuits: third-party litigation financing.

Litigation financing refers to the practice of private equity companies, hedge funds, and other investors taking a calculated risk to invest in lawsuits, according to The State Bar of California Standing Committee on Professional Responsibility and Conduct. The Insurance Information Institute estimates that $30 billion will be invested in litigation financing by 2028.

A simple example that typifies the arrangement is an investor paying for legal expenses in exchange for a portion of the settlement. A plaintiff may agree to this in hopes of increased damage awards.

The downsides to litigation financing include prolonged litigation, litigants receiving only a fraction of the award, litigants demanding higher settlements to cover the cost of the investments, and funding agreements impacting an attorney’s judgement when representing a client. The ultimate downside occurs when underwriters charge higher policy premiums or reduce appetite, making coverage very difficult or impossible to obtain.  

As the practice of third party litigation financing grows more common, legislation and regulation must catch up and may need to implement guidelines to better protect the interests of both policyholders and insurers.

If you have questions regarding social inflation and the impact on your policy premiums, please contact me at 619-937-0175 or sbrown@ranchomesa.com.