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Social inflation, particularly driven by third-party litigation funding, has become an increasingly important part of the casualty insurance conversation. Outside investors can provide capital to plaintiffs, law firms, or litigation practices in exchange for a financial return tied to litigation success. While supporters argue that such financing can improve access to the legal system, insurers and other critics have raised concerns that outside capital can prolong litigation, increase settlement demands, and contribute to rising claim severity.

Now, California has entered the debate with a new approach. Governor Gavin Newsom signed Assembly Bill 2305 into law on September 20, 2026. The legislation restricts corporate legal funders, including certain private equity firms, hedge funds, and other capital providers, from controlling or improperly influencing substantive litigation decisions. The law applies to contracts entered into on or after January 1, 2027.² For retail agents, the immediate significance is not a change in insurance coverage. Rather, AB 2305 is one of several recent state-level efforts to address litigation funding and outside influence over litigation, adding momentum to a broader national discussion around the effects of social inflation on rising casualty claim costs.

WHAT AB 2305 ACTUALLY DOES

AB 2305 focuses on control rather than the outright elimination of litigation finance. Under the new law, a corporate legal funder cannot interfere with substantive litigation decisions or exercise control over litigation functions in a way that constitutes the unauthorized practice of law. The statute defines control broadly enough to encompass decisions involving client representation, litigation strategy, settlements, funding decisions, and the selection or management of counsel.²

Importantly, the law does not prohibit nonrecourse litigation finance. Certain funding arrangements remain permissible when statutory requirements are satisfied, including limits on the funder’s return and restrictions that prevent the financing from being used to solicit or acquire future clients.²

Violations can expose attorneys to State Bar discipline and subject both attorneys and corporate legal funders to civil remedies, including statutory damages of $10,000 per violation or three times actual damages, whichever is greater.² For the casualty market, the distinction matters. California has not removed outside capital from litigation. It has drawn a clearer boundary between financing a case and controlling it.

WHY CASUALTY INSURERS ARE WATCHING LITIGATION FUNDING

The legislation arrives against a challenging casualty backdrop. A 2025 analysis from the Casualty Actuarial Society and Insurance Information Institute estimated that legal system abuse and related litigation trends contributed between $231.6 billion and $281.2 billion in increased liability insurance losses over the prior decade. The analysis identified rising jury awards, litigation financing, and evolving legal dynamics among the factors driving higher claim and defense costs.³

The Insurance Information Institute has similarly identified third-party litigation funding as one contributor to social inflation, alongside larger jury awards, changing litigation strategies, attorney advertising, and shifting societal attitudes. The Social Inflation Index estimated that social inflation added approximately seven percentage points to U.S. liability claims growth in 2023.⁴

That distinction is important. Litigation funding is one of several factors, and the extent to which it independently drives claim severity remains difficult to quantify. The Casualty Actuarial Society notes that the contribution of individual social inflation drivers remains uncertain and, in some cases, disputed.⁵ Still, carriers are paying attention because higher settlements and verdicts ultimately affect loss development, reserves, pricing, attachment points, and the amount of capacity insurers are willing to deploy.

The financing structures themselves are also evolving. As states impose new requirements on traditional third-party litigation funding, some capital providers are exploring portfolio financing, private equity partnerships, and management services organization structures that provide capital at the law-firm level rather than financing individual cases.⁸ That evolution helps explain why newer laws in states such as California and Illinois increasingly focus not only on funding arrangements, but also on who can influence litigation strategy and attorney decision-making.

THE EXCESS CASUALTY CONNECTION

The impact of litigation trends becomes particularly visible in excess casualty. When awards reach tens or hundreds of millions of dollars, losses can quickly move up the excess liability tower, often depleting all the excess layers. That has significantly contributed to continued underwriting discipline even as other insurance segments have softened.

The Insurance Information Institute reports that umbrella and excess liability insurers continue to contend with adverse U.S. litigation trends. Many insurers cap single-risk capacity at $10 million or less, while higher attachment points and continued rate pressure remained common for challenging risks.⁶

For retail agents, this helps explain an important market dynamic: an insured can have excellent individual loss experience and still encounter casualty pricing pressure because carriers are underwriting against broader severity trends.

COULD CALIFORNIA’S APPROACH SPREAD?

California is not acting in isolation. States across the country are taking increasingly different approaches to third-party litigation funding, with many focusing on transparency, outside control, foreign investment, and the financial relationships between funders and law firms.

To date, 20 states have enacted laws regulating litigation funding, including 13 that added restrictions within the prior two years.⁸ North Carolina took one of the most aggressive approaches in June 2026 by prohibiting certain commercial litigation funding arrangements. Other states have opted for guardrails rather than outright prohibitions, including disclosure requirements, restrictions on foreign funding, limits on investor influence over litigation strategy, and other regulatory controls.⁸

Illinois offers another recent example. HB 5487, enacted as Public Act 104-0801 on August 7, 2026, restricts certain nonlawyer-owned entities and management services organizations (MSOs) involved with law firms from interfering with attorneys’ professional judgment. The law also restricts fees tied directly or indirectly to a law firm’s fees, revenue, or profits, and requires covered MSO arrangements to be disclosed in attorney-client contracts. Violations can result in statutory damages of $10,000 per violation or three times actual client damages, whichever is greater.⁹

Like California’s approach, the Illinois law is not an outright prohibition on outside financing. Ordinary loans and extensions of credit remain permissible when repayment is not contingent on, or calculated from, a law firm’s fees, revenue, profits, or other financial performance.⁹ These developments are particularly relevant as litigation funders explore structures beyond financing individual cases. Carrier Management reports that some funders are increasingly using portfolio financing, private equity partnerships, and MSO structures to provide capital at the law-firm level rather than directly funding individual lawsuits.⁸

For casualty insurers, the potential impact is meaningful but indirect. Restrictions on funder control, financial participation, and disclosure could influence how some plaintiff firms are capitalized and how litigation is financed. Whether those changes ultimately reduce claim severity, settlement demands, or nuclear verdicts remains to be seen. What is clear is that litigation funding regulation is increasingly becoming a state-by-state issue. California and Illinois illustrate two approaches focused on outside influence and attorney independence, while other states are pursuing disclosure requirements, foreign-funding restrictions, or broader limits. Retail agents should expect this legal landscape to continue evolving.

WHAT RETAIL AGENTS SHOULD WATCH

AB 2305 does not require retail agents to change a client’s insurance program today. It reinforces why agents should continue to monitor the legal environment surrounding casualty risks.

Several considerations remain important:

• Venue is critical. Litigation environments can vary significantly by jurisdiction.
• Limits deserve regular review. Rising claim severity can challenge programs structured around historical loss assumptions.
• Excess attachment and capacity remain important. Carriers continue to evaluate how quickly catastrophic claims could penetrate higher layers.
• Risk management still matters. Documentation, contractual risk transfer, safety controls, and strong claims practices can help insureds present a more defensible risk.
• The state-by-state landscape deserves attention. Litigation funding rules are increasingly a patchwork of disclosure requirements, restrictions on funder control, prohibitions on foreign funding, financial limitations, and other guardrails. These differences may become another factor carriers consider when evaluating venue and long-tail casualty exposure.

Retail agents do not need to become litigation-finance experts. They do need partners who understand how developments in the legal environment can affect casualty underwriting.

BOTTOM LINE

California AB 2305 is part of a broader shift in how states are approaching third-party litigation funding and outside investment in the legal system. California is restricting corporate funders’ control over substantive litigation decisions; Illinois is addressing financial relationships and MSO influence over law firms; and other states are pursuing disclosure requirements, foreign-funding restrictions, payout limitations, or broader prohibitions. The approaches differ, but the direction is clear: litigation funding is receiving greater legislative scrutiny.

Whether the law ultimately reduces claim severity, nuclear verdicts, or casualty insurance costs remains to be seen. Those outcomes will require time and credible loss data to evaluate. But the broader trend matters. Litigation financing and large jury awards, the core pieces of social inflation, remain central concerns for casualty insurers, particularly in excess and umbrella layers.

For retail agents, navigating this environment requires more than watching rates. CRC Specialty’s casualty specialists track the legal, claims, and underwriting trends shaping carrier appetite, attachment points, capacity, and program structure. By bringing Team CRC into the conversation early, agents can better evaluate evolving severity exposures and build casualty programs designed for today’s litigation environment. Connect with your CRC Specialty producer to discuss how changing litigation trends may affect your clients’ casualty programs.

CONTRIBUTOR

• Bob Greenebaum is an Executive Vice President, Central Region Director, and Casualty Practice Advisor located in CRC Group’s Chicago, Illinois office.

END NOTES

1. Insurance Information Institute. What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability?
2. Legiscan. California Assembly Bill 2305, Chapter 393, Statutes of 2026; California Senate Judiciary Committee Analysis.
3. Casualty Actuarial Society and Insurance Information Institute. New CAS and Triple-I Analysis Quantifies Impact of Legal System Abuse on Liability Insurance Losses. October 31, 2025.
4. Insurance Information Institute and Casualty Actuarial Society. Increasing Inflation on Liability Insurance: Impact as of Year-End 2024. October 2025.
5. Casualty Actuarial Society. New Research RFP Seeks to Quantify Reinsurance Costs from Social Inflation. December 18, 2024.
6. Insurance Information Institute. Liability Loss Trends Outpace Insurance Limits. June 24, 2024.
7. Insurance Information Institute. How Legal System Abuse Drives Social Inflation.
8. Carrier Management. One Battle After Another: What TPLF Victory in North Carolina Means. August 18, 2026.
9. Illinois General Assembly. Public Act 104-0801 (HB 5487), Protection of Clients.