20+ States Now Regulate Litigation Funding

More than 20 states have now enacted laws regulating litigation funding, and a federal rules committee may consider disclosure requirements as early as October 21, according to the Insurance Information Institute (Triple-I). North Carolina has gone furthest, banning the practice outright.

Third-party financing of lawsuits — in which outside investors fund cases in exchange for a share of any settlement or judgment — has grown into a multibillion-dollar industry. Critics, including insurers and business groups, argue it inflates litigation costs and encourages meritless claims. Supporters say it expands access to justice for plaintiffs who could not otherwise afford to sue.

Litigation funding disclosure laws spread across states

The wave of state legislation focuses primarily on disclosure of outside investment in lawsuits, requiring parties to reveal funding arrangements to courts and opposing counsel. More than 20 states have adopted such measures, reflecting a bipartisan concern that secret third-party stakes in lawsuits distort settlement negotiations.

North Carolina's outright ban represents the most aggressive stance. Lawmakers there concluded that disclosure was insufficient and that the practice itself undermines the integrity of the civil justice system. Other states have taken intermediate steps, capping funders' returns or requiring court approval of funding agreements.

Triple-I, the insurance industry's research arm, has been among the most vocal advocates for regulation. The institute argues that mandatory disclosure is essential for defendants and courts to understand who truly controls a case — and whose financial interests are driving litigation strategy.

Federal rules panel may act on litigation funding

The federal dimension could arrive soon. A federal rules committee is expected to consider whether to require litigation funding disclosure in federal court proceedings, with discussion possible on October 21. A federal rule would standardise practice across jurisdictions and close gaps left by the patchwork of state laws.

Insurers are watching closely. Triple-I cites third-party litigation funding as a driver of persistent unprofitability in general liability and commercial auto insurance lines, where inflated settlements and prolonged litigation have pushed loss ratios higher and general liability insurance results have deteriorated. General liability insurers say funded cases settle for more and take longer to resolve, costs ultimately passed to policyholders.

The state-level momentum reflects years of lobbying by insurance groups and chambers of commerce, which argue that undisclosed lawsuit investment encourages speculative litigation. Industry data show commercial auto and general liability lines posting combined ratios above 100 for several consecutive years, meaning carriers pay out more in claims and expenses than they collect in premiums. Funders dispute the causal link, noting that rising verdicts reflect broader social inflation rather than the source of plaintiffs' financing.

Debate over third-party litigation funding intensifies

Defenders of third-party litigation funding counter that the industry democratises the courts, enabling individuals and small businesses to take on well-resourced defendants. They argue that disclosure mandates are often a stalking horse for outright bans that would protect corporate wrongdoers.

The October 21 federal discussion will test which view prevails nationally. With more than 20 states already regulating litigation funding and North Carolina banning it, momentum favours the critics — but the industry's access-to-justice argument retains influential supporters in the plaintiffs' bar and among consumer advocates.

For general liability insurance carriers, businesses and litigants alike, the direction of travel is clear: the era of undisclosed outside investment in American lawsuits is ending, one statute — and possibly one federal rule — at a time.