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Keven Moore: Growing nuclear verdicts fueled by third-party litigation funding — here’s how

Long gone are the days when someone or a group of people were injured, killed, or has been wronged by a big corporation; and a local small attorney or law firm would take on Goliath and win a big case alone.
One of the drawbacks of a small-time attorney taking on a Goliath for a wrongful death case, or considering a class action lawsuit has always been the lack of funding, to take on an army of attorneys with endless supply of funds.
Hollywood has a list of such movies with a variety of different plots and twists where the plaintiff sues big business and wins such as Erin Brockovich, Dark Waters, The Insider, Michael Clayton, A Civil Action. . .etc.

Keven Moore works in risk management services. He has a bachelor’s degree from the University of Kentucky, a master’s from Eastern Kentucky University and 25-plus years of experience in the safety and insurance profession. He is also an expert witness. He lives in Lexington with his family and works out of both Lexington and Northern Kentucky. Keven can be reached at kmoore@higusa.com

The legal landscape today has changed greatly in the last few years and today we are seeing verdicts growing from nuclear verdicts to thermonuclear-sized verdicts. All you have to do is watch the commercials on TV, or drive down the interstate and see all the Attorney billboards to realize that this is a growing business.
A new report from Marathon Strategies found that the median nuclear verdict against corporate defendants jumped from $21.5 million in 2020 to $41.1 million in 2022 – a 95% increase – while the number of verdicts doubled. Nuclear verdicts are jury awards that surpass $10 million.

There are a variety of reasons that have contributed to this escalation of nuclear verdicts and one of them is Third-Party Litigation funding (TPLF) — also known as legal funding, third-party litigation finance, or alternative litigation financing — is when a third party invests in a lawsuit in exchange for a percentage of the proceeds if the lawsuit is successful. This part of the reason why we have seen a handful of law firms grow into national firms in a short period of time.

Litigation funders are typically private firms that obtain investment capital from a variety of investors, such as endowments and pensions. While TRLF has been well established for decades in some countries, such as Australia and England, it gained a foothold in the U.S. around 2010, according to literature from the US Government Accountability Office (GAO). However, publicly available data on the market is very limited. Some policymakers have raised concerns about the transparency of funding arrangements and other issues.
Although exact figures are unknown due to the obscurity of this practice, insurance company Swiss Re estimates that its worldwide market will reach $30 billion by 2028, with the United States representing the largest market. Swiss Re also notes that TPLF investments have recently produced internal rates of return of 25% or more. Due to the rising prevalence of TPLF, it is essential to be aware of this trend and its effects.
TPLF generally involves financers (e.g., Wall Street hedge funds) investing in ongoing litigation. This may be done by providing the funds directly to a plaintiff or law firm or through a broker or company that specializes in TPLF.

Third-party litigation financing is an arrangement where a funder that is not a party to a lawsuit agrees to provide funding to a litigant (typically a plaintiff) or law firm in exchange for an interest in the potential recovery in a lawsuit (see figure). Plaintiffs do not have to repay the funding if their lawsuit is not successful.

This funding generally falls into two categories: commercial and consumer funding. Commercial arrangements are between funders and corporate litigants or law firms. For example, a funder agrees to provide funding for legal or business expenses in exchange for a portion of the court award if the plaintiff wins. Commercial litigation receives most TPLF, according to analysts. Money may be directed to various types of cases, including those involving intellectual property, arbitration, business torts, and contract breaches. Class-action suits may also be funded.

Consumer arrangements are between a funder and an individual, such as the plaintiff in a personal injury case. Personal or consumer litigation funding occurs when investors provide money to individuals to pay for living or medical expenses they may incur while a case is litigated.

Investors engaging in TPLF typically provide nonrecourse loans against a case or a portfolio of cases in exchange for an equity-like stake in the financial outcome that may result. Funding can occur at all stages of a lawsuit and is not contingent on the plaintiff receiving a judgment or settlement.
Litigation finance companies may also work to establish relationships with law firms or utilize search databases to find cases to finance and will conduct extensive research when selecting which cases to fund. 
Many advocates for TPLF claim such practices helps to balance the scales of justice by allowing underfunded plaintiffs to pursue legal action against deep-pocketed industries, critic suggests that the practice leads to increased insurance rates and less favorable policy terms and conditions. Because TPLF is generally not required to be disclosed, transparency as to whether a party has received it is lacking.

This then makes it hard for insurance companies to calculate and plan for associated costs and mitigate legal risks, which in turn leads to an increase in insurance costs for consumers.
Additionally, opponents of TPLF state that it may disincentivize efficient litigation since law firms may receive payments regardless of the case’s outcome, and funded claimants may alter their settlement strategy since part of their share may be eroded by paying back the investor. Moreover, juries may not receive the whole picture of who receives the money when they award damages, which may influence their decisions.

Data suggests that TPLF may be a driver of social inflation, a concept that refers to the increase of insurance claims’ costs above that of the general economy’s inflation rate. Swiss Re notes that there has been an increase of multimillion-dollar claims in the U.S. general liability and commercial auto areas and that TPLF incentivizes initiating and prolonging lawsuits while diverting a larger percentage of proceeds to the funder instead of the plaintiff. These expanded costs may be difficult for insurers to quantify and mitigate since they are hard to predict. Opponents of TPLF are pushing for more transparency and regulation of the practice.

The fact is these nuclear verdicts will continue to rise, which in turn will be paid by insurance companies, and then will be passed down to business owners and corporations, which in turn will be passed down to you and me, the consumers.

Be Safe My Friends

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