Lawmakers in three states and in Congress have introduced bills to impose more controls on litigation funding companies, which insurers contend are one of the factors leading to an increase in “nuclear verdicts” that have pushed up claims costs and insurance rates.
Last week, Utah state Sen. James A. Dunnigan became the latest lawmaker to file legislation that would place litigation funding companies under state regulation. His House Bill 312 would require firms that lend money to plaintiffs to pursue lawsuits to pay about $700 a year in fees to register with the Department of Commerce and establish new rules governing their conduct, according to a legislative analysis.
State lawmakers in Florida and New York are considering similar measures. Seven litigation financing bills have been introduced in the New York state Assembly and Senate. Both Democrats and Republicans have signed on as co-sponsors.
While business groups support stricter controls to curb the influence of litigation funders over the justice system, some lawmakers are motivated more by perceived abusive practices toward consumers.
“Some of the fees being charged by the companies were so high that whatever the verdict was, the victims ended up getting very little or close to nothing,” said Assemblyman William B. Magnarelli, D-Syracuse. “That didn’t seem right to me.”
Magnarelli introduced Assembly Bill 6866, which would require funding contracts to contain a right of rescission, a written acknowledgement by the attorney retained and a clear outline of the scheduled fee structure.
Two identical bills have been introduced in Florida. The House of Representatives’ Civil Justice Subcommittee on Feb. 5 voted 20-2 to approve House Bill 7041 by subcommittee chairman Tom Leek, R-Daytona Beach. The bill requires litigation funders to register with the Department of State, caps fees at $500, limits any interest charged at 30 percent and requires disclosure of the funding agreements to the court.
The American Property Casualty Insurance Association lauded the subcommittee’s vote to approve the Litigation Financing Consumer Protection Act.
“HB 7041 contains strong consumer protections, such as capping interest rates, fees, and charges and subjecting litigation financiers to the Florida Deceptive and Unfair Trade Practices Act. Together, this will go a long way toward improving Florida’s deteriorating legal climate,” stated Logan McFaddin, assistant vice president of state government relations.
An identical measure is awaiting consideration by the Florida Senate.
In Congress, three Republican senators have introduced Senate 471, a bill that would require firms that pursue class-action suits in federal courts to disclose their participation in court filings.
Advocates for insurers say litigation funding companies are a factor in the “social inflation” that is leading to larger jury verdicts that far exceed expectations. Swiss Re, in a report last year, pointed to one law firm’s study that found the top 50 single-plaintiff bodily injury verdicts in the United States climbed from an average of $27.7 million in 2014 to $54.3 million in 2018.
Lockton Companies said in a report addressing the commercial auto market that litigation funders are partly to blame for rapid rate increases in the sector.
Litigation funding started in Australia and the United Kingdom in the mid-1990s and entered the U.S. in the mid-2000s, according to an article in the American Bar Association Journal. A report released by Westfleet Advisors in November identified 41 private funders in the U.S. with $9.5 billion in assets under management. Those firms spent $2.3 billion on litigation last year, the report says.
Westfleet, which is in the litigation funding game itself, said the industry isn’t deploying capital to fund litigation as fast as the investment money has been coming in. The firm said that creates favorable conditions for attorneys who use third-party funding because the financers are willing to give better terms.
That situation worries insurers and business groups.
At least two states have imposed rules on litigation finance companies. Wisconsin in 2018 passed a bill that requires litigation funding agreements to be disclosed in discovery. West Virginia passed a broader bill in 2019 that requires litigation funders to register with the Attorney General’s Office, disclose the terms of agreements and imposes voluminous rules on conduct.
Much of the pressure to impose controls is coming from the U.S. Chamber of Commerce’s Institute for Legal Reform. The Chamber on Jan. 27 released a report that called litigation funding a recipe for impropriety. The title: Funding More Lawsuits, Buying More Trouble.
The institute said while third-party litigation funding agreements generally are not disclosed, those that have been made public show that they spawn frivolous and abusive litigation and put the interest of the financing companies over the interest of plaintiffs.
“If a third party has a financial stake in a lawsuit, that third party will naturally seek to control the lawsuit and, as a result, the lawyers being funded by that third party will be controlled by that third party, sometimes to the detriment of the actual party in interest,” the report says.
Even where there are no specific statutes, several courts have taken steps to ensure that litigation finance companies disclose their involvement in lawsuits. For example, U.S. District Judge Dan Polster in the Northern District of Ohio ordered attorneys who were working on a contingency arrangement with a litigation funder to write a letter (to be seen only by the judge) identifying the funding source, according to the National Law Journal. Polster was presiding over multi-district litigation over the opioid epidemic.
Similarly, in 2019 District Court Judge Paul Grimm of the District of Maryland required lawyers involved in multi-district litigation concerning a data breach of Marriott hotels to disclose whether they planned to receive outside financing, according to the Chamber’s “More Trouble” report.
The American Association for Justice, which represents plaintiff’s lawyers, said any restrictions on litigation financing should be considered carefully.
“Commercial funding ensures that litigants have the resources to take on powerful corporate interests,” said Communications Director Peter Knudsen in a prepared statement. “Defense interests—not the public—are pushing for disclosure to gain a tactical advantage because they don’t want a level playing field.”
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