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Home / Insurance / Triple-I blog | Lawsuits financing laws were found missing in the Transparency Department

Triple-I blog | Lawsuits financing laws were found missing in the Transparency Department



Particular efforts to provide transparency in the financing of third-party litigation continued at a rapid pace (albeit at a snail̵

7;s pace) with the legislation that the Illinois governor signed into law on May 27.th.

The financing of litigation from investors without a share in addition to the possibility of benefiting from any settlement has been a growing contributor to the phenomenon known as “social inflation”: Increased insurance payments and higher loss ratios than can be explained by economic inflation alone. These increased costs will necessarily be shared by all policyholders through increased premiums.

Financing litigation not only drives up costs – it introduces motives in addition to achieving fair results to the legal process. This is why exercise was once banned in the United States. As these bans have eroded in recent decades, litigation funding has grown, spread, and turned into forms that could cost plaintiffs more in interest than they might otherwise receive in a settlement. In fact, it can encourage longer processes to the detriment of everyone involved – except for the financiers and the plaintiffs’ lawyers.

Funding for lawsuits by international hedge funds and other third parties has become a $ 17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even bigger, with $ 39 billion globally, according to Bloomberg.

But it is difficult to actually know how big the industry is and how much damage it can cause because, in most cases, the plaintiffs’ lawyers are not required to disclose whether, to what extent and under what conditions third party financiers are involved in the cases where they takes to court.

Goes towards transparency

In April, we reported on the partial, insidious progress towards creating greater transparency in this practice in courtrooms and state legislatures. Last year, the U.S. District Court for the District of New Jersey changed its rules to require disclosure of the financing of third-party disputes in court cases. The Northern District of California introduced a similar rule in 2017 for class, mass, and collective action throughout the district. Wisconsin passed a law requiring disclosure of third-party financing agreements in 2018. West Virginia followed after 2019.

At the federal level, the law on the legal financing of transparency was introduced and referred to the House Judiciary Committee in March 2021. The measure was referred to the Subcommittee on Courts, Intellectual Property and the Internet in October last year.

Illinois law, originally enacted in 2021, has some similarities with Wisconsin’s law – but the version signed last week contained “inadequate regulatory safeguards,” the American Property Casualty Insurance Association (APCIA) said. In its letter urging Governor JB Pritzker to veto the measure, APCIA said a major problem is that it allows interest to be paid by the plaintiff / borrowers in such cases “which should be calculated as a maximum of 18 percent of the amount funded. , assessed every six months for up to 42 months. “

The legislation does not clarify whether the interest calculation of 18 percent is simple, compound or cumulative interest during the 42-month period.

“This ambiguity is problematic, as a cumulatively calculated interest rate can be as high as 126 percent!” in APCIA. “It is essential for consumer protection that this interest rate calculation is clarified.”

The APCIA further states, “The parties to these financing agreements are not obliged to disclose their existence, so that the courts and defendants are not usually aware of the presence or identity of the financiers as real parties to the litigation. The financiers’ financial interests in these transactions are significantly strengthened by deterring an amicable settlement of disputes, all for the benefit of no one but the interest of the lenders. “

The legal profession is also concerned about the ethical consequences of financing litigation. In 2020, the political branch of the American Bar Association (ABA) approved a set of best practices for these events. The resolution lists the issues that lawyers should consider before entering into agreements with external financiers – but it does not take a position on the use of such financing.

A standardized approach to disclosure would go a long way in helping decision makers and decision makers determine an appropriate way forward.


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