Are hedge funds turning lawsuits into profit engines and pushing verdicts into the stratosphere? Third-party litigation funding (TPLF) is booming in the US, empowering longer, costlier cases and driving nuclear payouts. Discover how these trends reshape verdicts, social inflation, and insurance affordability.
While third-party litigation funding may be unfamiliar to many outside legal and financial circles, its implications are profound. Understanding how it works and how it fuels social inflation can help brokers, carriers, and clients navigate a more volatile insurance environment.
WHAT IS THIRD-PARTY LITIGATION FUNDING?
TPLF allows outside investors, often hedge funds, private equity firms, or specialty finance companies, to fund lawsuits in exchange for a share of any financial recovery. The plaintiffs and their attorneys are not required to repay the investment if the case is lost, which makes it a non-recourse financing tool. In return, funders often receive a substantial portion of any settlement or award.
TPLF is frequently used in high-stakes personal injury cases, class actions, commercial disputes, and increasingly, mass tort litigation. With investors seeking high returns and plaintiffs facing few financial risks, this model encourages longer and more aggressive litigation, often pushing cases to trial rather than settlement.
THE RISK OF TPLF IN THE US?
TPLF is a relatively new phenomenon in the US legal system, but it has grown rapidly in the last decade, with more than 50% of global litigation funding occurring in the US.1 A Washington Legal Foundation report estimated that litigation funding in the USwill surpass $18.9 billion by the end of 2025, fueled by the search for alternative asset classes offering outsized returns. 2
Despite its growth, the industry remains largely unregulated. Funders are not typically required to disclose their involvement in litigation, and courts rarely compel plaintiffs to reveal funding arrangements. This opacity leaves insurers and defendants withlimited insight into their opponents’ motivations and financial backing.
TPLF + THE RISE OF NUCLEAR VERDICTS
One of the most concerning impacts of TPLF is its role in driving “nuclear verdicts,” jury awards that exceed $10 million. These verdicts are becoming more frequent and more severe. From 2010 to 2019, the median nuclear verdict rose from $19.3 millionto $24.6 million. 7
TPLF plays a key role in this trend. By removing the financial constraints that once pressured plaintiffs to settle, litigation funding enables cases to go to trial with aggressive legal teams and expansive expert testimony. The result is often inflateddamages, fueled by emotionally charged narratives and the perception that “deep pockets,” whether insurers or corporations, can afford to pay.
It is estimated that social inflation, driven in part by litigation funding, has contributed to a 57% increase in US liability claim costs over the past decade. Social inflation is growing at approximately 5.4% annually, with a 7% spike recorded in 2023.5
However, it is also likely that TPLF reduces the plaintiff’s share of awards. For example, in 2016, plaintiffs generally received 55% of compensation from the commercial liability tort system. However, when TPLF was involved, that estimate dropped to 43%. Some data shows that TPLF agreements in commercial and personal liability claims may reduce plaintiff compensation by over 20%. This means that for a plaintiff to receive the same payment in a case with TPLF as opposed to one without, the plaintiff would need an award that is 27% higher.3
THE IMPACT ON THE INSURANCE INDUSTRY
The implications for the insurance industry are significant. TPLF increases the cost of claims, makes losses more volatile, and complicates efforts to price risk accurately. Insurers are forced to raise premiums, increase retentions, or exit high-risk markets altogether.
The top end of a range of estimates of direct costs likely to be paid to funders by casualty insurers is $25 billion over five years (2024-2028). Another study found that if estimated direct and indirect TPLF-related expenses are combined, they could reach $50 billion.
This would add approximately 7.8 points to the commercial liability industry loss ratios for each of the next five years, with themost likely scenario (50th percentile) falling between 4.5 and 5.5 loss ratio points. 8
Lines of business most affected include commercial auto, general liability, product liability, and professional liability. These lines are particularly vulnerable to high-dollar jury awards and prolonged legal battles. Insurers are paying for these outsized verdicts, which drives up the cost of insurance and the price of goods and services.6
From a carrier perspective, TPLF also limits transparency during discovery. Defendants may not know whether a case is being funded, who is influencing litigation strategy, or whether the plaintiff is incentivized to reject reasonable settlements. This lack of visibility hampers claims resolution and can result in extended defense costs.
Reinsurers, too, are feeling the pressure. According to Risk & Insurance, social inflation driven by litigation funding has made it more difficult for reinsurers to predict losses and reserve appropriately. The entire risk chain is impacted, from primary insurers to reinsurers and capital providers.5,6
ETHICAL + LEGAL CONCERNS
TPLF also raises critical ethical questions. Should outside investors be allowed to influence legal strategy in pursuit of profit? Should their involvement be disclosed? Are plaintiffs always acting in their own best interest when a funder has a stake in the outcome?
In some cases, funders may require a say in whether a case settles or goes to trial. Critics argue that this undermines the plaintiff’s autonomy and creates conflicts of interest. Others warn that undisclosed funding arrangements may distort the judicial process by incentivizing litigation that would not otherwise occur.
Some jurisdictions are starting to take notice. In 2021, the Northern District of California became one of the first courts to require disclosure of third-party funding in class actions. However, broader regulatory reform remains limited.
HOW CAN THE INSURANCE INDUSTRY RESPOND?
The insurance industry is not powerless in the face of TPLF. Brokers, retail agents, and carriers can take several steps tomitigate their impact:
- Educate Insureds: Help clients understand how TPLF affects litigation risk, particularly in high-exposure industries. Risk awareness is key to proactive mitigation.
- Promote Tort Reform: Support legislative efforts to improve transparency and regulate TPLF disclosures.
- Invest in Claims Intelligence: Leverage data analytics and legal trend tracking to better anticipate funded litigation and nuclear verdict risk.
- Improve Underwriting Discipline: Scrutinize policy language, liability caps, and jury trends in underwriting decisions.
- Enhance Settlement Strategies: When litigation funding is suspected, consider early resolution. The longer a case drags on, the higher the potential payout.
BOTTOM LINE
As third-party litigation funding continues to gain traction, its influence on the insurance market will only grow. Brokers andcarriers must stay vigilant, educate stakeholders, and advocate for regulatory reforms that increase transparency and fairness.
The traditional calculus of litigation and insurance is changing in a world where billion-dollar investment firms can bankrolllawsuits. Those who understand this shift and adapt will be best positioned to protect clients and maintain profitability in anevolving legal landscape. Reach out to your CRC Specialty Producer today to discuss how best to protect your insureds.
CONTRIBUTORS
- Kristyn Smallcombe is CRC Specialty’s National Casualty Practice Director.
- Bob Greenbaum is an Executive Vice President and National Casualty Practice Advisor.
END NOTES
- US Litigation Funding and Social Inflation: The Rising Costs of Legal Liability, Swiss Re Institute, December 2021. https://www.swissre.com/institute/research/topics-and-risk-dialogues/casualty-risk/us-litigation-funding-social-inflation.html
- Beneath the Surface: A Deeper Dive Into Third-Party Litigation Funding, Washington Legal Foundation, August 4, 2025. https://www.wlf.org/2025/08/04/publishing/beneath-the-surface-a-deeper-dive-into-third-party-litigation-funding/
- Third Party Litigation Funding: A Significant Contributor to Nuclear Verdicts and Social Inflation, TransRe, November 2024. https://www.transre.com/wp-content/uploads/2024/11/TransRe-Third-Party-Litigation-Funding-Final.pdf
- Corporate Verdicts Go Thermonuclear: 2024 Edition, Marathon Strategies, December 20, 2024. https://marathonstrategies.com/wpcontent/uploads/2024/05/Marathon-Strategies_Corporate-Verdicts-Go-Thermonuclear-2024.pdf
- Social Inflation Drives 57% Surge in US Liability Claims Over a Decade, Risk & Insurance, 2024. https://riskandinsurance.com/socialinflation-drives-57-surge-in-us-liability-claims-over-a-decade/
- ‘Nuclear Verdicts’ Driving Up Costs of Doing Business, Wall Street Journal, December 30, 2024. https://www.wsj.com/articles/nuclearverdicts-driving-up-costs-of-doing-business-says-risk-management-societys-head-b8a401bd
- Nuclear Verdicts Trends, Causes, and Solutions, US Chamber of Commerce Institute for Legal Reform, September 2022. https://instituteforlegalreform.com/wp-content/uploads/2022/09/NuclearVerdicts_RGB_FINAL.pdf#:~:text=The%20median%20reported%20nuclear%20verdict%20increased%20from,a%2027.5%25%20cumulative%20increase%20in%20the%20median
- 5-Year Cost of Litigation Funding to Commercial Insurers Could Top $25B, Carrier Management, August 11, 2025. https://www.carriermanagement.com/features/2025/08/11/278267.htm