As mentioned in another blog, one of the key risks that insurance can protect you against is a lawsuit. It is no secret that the United States, by far, is the most litigious country in the world, and it is becoming more and more litigious. This trend is called “social inflation” and is driving up “nuclear verdicts.” One of the key contributors to social inflation is an industry that has recently taken off called “litigation finance.”
What Is Litigation Finance?
Litigation Finance is a newer industry where plaintiff attorneys are “funded” upfront to take on a case (which they often may not have taken on without the litigation funding). This model is also referred to as lawsuit financing in the industry. In the past, a plaintiff attorney would not take on cases on contingency that they knew had little chance of winning to make it worth their time and effort. However, they would take on a case if the plaintiff would pay them an hourly rate. If the attorney knew the case was frivolous/weak and the plaintiff could not pay upfront, the case simply would not even start.
Litigation Finance is now Fueling Frivolous Lawsuits
Prior to litigation finance, potential lawsuits driven by plaintiffs would not start because the plaintiffs:
- know the case is weak, so would not spend the time & energy pursuing litigation
- cannot afford to pay a good attorney the hourly rate upfront.
So, in the past, many frivolous lawsuits were not an issue of concern to many people and businesses. All this has now changed with litigation finance. In brief, there are finance companies that will “fund” a plaintiff’s attorney upfront to take on a case at no cost to the plaintiff — this is commonly known as lawsuit financing. Here is how it works: A private equity company or other legal finance company will fund a plaintiff’s attorney upfront to take on frivolous lawsuits. This is a game-changer because now cases that were weak or frivolous have some serious legal muscle behind them. With this financial support, some of what would be frivolous lawsuits now become a nuclear verdict that cost the defendant (potentially you) millions of dollars. The upside is shared by the plaintiff, the plaintiff’s attorney, and the financing company.
Lawsuit Financing: Who Wins—and Who Pays?
Still, most of these cases will go nowhere, some will settle at a reasonable amount, and a few will pop and pay out significantly (i.e., a nuclear verdict). With a nuclear verdict (or settlement), the law firm will make some of the upside, and the legal finance company (which funded the winning case, plus the others that did not pay out) will get a major slice of the upside. So basically, the law firm and the litigation funding companies both win!
The losers in this equation are you and your insurance company. And the trend of new capital entering the litigation finance space is not slowing down…it is estimated that the growth rate will far outstrip inflation for the foreseeable future. According to research, it will grow at an annual rate of 11.1% and will expand from 17.5B USD in 2025 to 67.2B in 2037. That will continue to increase both non-insured and insured losses. Litigation finance is just one component driving up the cost of lawsuits as part of a broader topic known as social inflation. In addition to lawsuit financing, other contributors to social inflation are:
- changes in public sentiment (and jury sentiment)
- legal landscape
- impact of the media
- changes in court sentiment
- erosion of tort reform
- broadening of statutes of limitations, etc.
While those are beyond the scope of this blog, it is important to note that there are many other drivers increasing both the frequency and severity of lawsuits and lawsuit risks
Why Strong Insurance Matters in the Age of Legal Finance
The bottom line is simple. Whether you are a business owner or just an average person, you are at risk of a lawsuit. The frequency AND severity of lawsuit risks to both businesses and people are on the rise. I hope you don’t face one, and if you do, I also hope you have good insurance protection in place. In most cases, just a million bucks will not cut it.
Of course, we can help. Just reach out.
-Seth Patel
April 20, 2025
Wall Street, NYC
Founder & CEO of Prana Risk
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