A new advocate group in New York that counts the American Property Casualty Insurance Association (APCIA) as a member is looking to crack down on the practice of litigation funding.
The Consumers for Fair Legal Funding (CFLF) said it is pushing for state legislation to reform the unregulated lending of funds to plaintiffs or plaintiffs’ lawyers at high interest rates for a return on future settlements.
The group said that “lawsuit lending” or “lawsuit cash advances” are often backed by hedge funds that charge interest “that far exceed the limitations for criminal and civil usury.”
Third-party litigation funding was frequently cited during recent insurance company earnings calls as a driver of higher claims costs. Last year, Chubb CEO Evan Greenberg called for litigation funding reform at the state and federal levels to “combat the abusive power of the trial bar and address out-of-control awards.”
Several months ago, Swiss Re issued a report that said litigation funding is helping drive up the size of verdicts in U.S. courts and is contributing to growing loss ratios for excess liability, commercial auto, medical malpractice and general liability.
Citing data from the U.S. Chamber of Commerce’s Institute for Legal Reform, Swiss Re said plaintiffs received 55 percent of awards in cases that were not funded by third parties, but only 43 percent of awards in cases financed by third-party litigation funders.
According to a 2020 study by law professors, funders rake in an annual median gross profit of 55 percent on mass tort claims, pre-settlement. Post-settlement loans resulted in 68 percent profit. The professors recommended the contracts be regulated and lenders should be subject to usury laws.
CFLF said some individual borrowers reported paying more than 100 percent annual interest on the loans.
Rev. Kirsten John Foy, CFLF spokesman and CEO of The Arc of Justice, said he knows first-hand about what he called an “insidious practice.” After significantly injuring his knee and shoulder due to what he said was police officer negligence at a 2011 parade, Foy sued the city and police department and took out a loan. He said he received only a fraction of a six-figure settlement.
“I have not previously spoken publicly about this embarrassing and hurtful experience,” said Foy, in a statement. “It is time for Albany to regulate lawsuit lending and provide greater transparency and protection for those who need cash in the short term and choose to go this route.”
APCIA-supported legislation to regulate and cap interest rates for lawsuit lending is pending in the state Senate and Assembly. CFLF said it is seeking more information, including disclosure requirements. APCIA has also supported legislation to regulate litigation funding in Missouri.