Last week, the American Property Casualty Insurance Association (APCIA) hosted its annual conference in Chicago. Taking place shortly after the horrific destruction created by Hurricane Helene and the pending onslaught of Hurricane Milton, the presidential election and a new composition of Congress was top of mind.

The same week, the chairman of the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet, Rep. Darrell Issa (R-California), and Rep. Scott Fitzgerald (R-Wisconsin) introduced H.R. 9922, the “Litigation Transparency Act of 2024" into the U.S. House of Representatives, which would require the disclosure of investors who have a right to receive payment based on the outcome of a case, as well as the disclosure of the financing agreement between investors and plaintiffs.

While third-party litigation funding has been an emerging issue over the past several years, its evolution is creating deeper ripples across not just the insurance ecosystem but through the judiciary, where an opaque litigation environment is causing concern. At the APCIA Annual Conference 2024, a panel of experts described the troubling implications of third-party litigation funding.

There are now numerous foreign third-party funders, of which the number and origins are mostly unknown, pointed out Paul Taylor, visiting fellow, National Security Institute, George Mason University.

Third-party litigation funding's primary goal is to generate large returns, the panelists agreed. Also, via some plaintiffs, third parties aim to harvest the defendant's proprietary information, posing a threat to intellectual property (IP) privacy and creating a form of “economic warfare," explained Vishal Amin, head of intellectual property policy at Intel, who noted that in one case involving Samsung, a Chinese company was involved in third-party litigation funding and requested confidential company information.

Meanwhile, Stef Zielezienski, executive vice president and chief legal officer at APCIA, referred to third-party litigation funding as “the commercialization of the judicial system."

Bob Goodlatte, former U.S. House Representative for Virginia, raised an important and overlooked aspect of third-party litigation funding: attorney ethics and conflicts of interest. Due to the lack of transparency, a judge cannot be sure whether any of the litigation parties have a conflict of interest with the source of third-party litigation funding. Considering that as part of litigation an insurance company must provide a copy of the defendant's insurance policy, there is currently no requirement for the identity of the third-party litigation funder to be disclosed.

Goodlatte pointed out that in the era of nuclear verdicts, juries are often unaware of the facets of third-party litigation funding and rarely realize that 60%-70% of the total award in a funded case typically does not go to the plaintiff.

Third-party litigation funding has ushered in the concept of “litigation as a casino," Goodlatte said, with profit as the prime litigation motive versus a remedy to an injured party.

Funders can even have the final say in settling a case in some instances, not the plaintiff's lawyer, Taylor said, before mentioning one case where the funding provider refused a settlement to reach the highest possible award so it could use the results to market its services in future cases.

On a positive note, a few states now require some form of third-party litigation funding transparency in state court litigation. At the federal level, the “Protecting Our Courts from Foreign Manipulation Act of 2023" bill has been pending in the U.S. Senate and focuses on the foreign security threat posed by the lack of transparency.

With the presidential election less than a month away, the potential implications were front and center. David Sampson, APCIA president and CEO, lamented that the polarization of politics has created an environment where many elected officials are more interested in exploiting issues to appeal to their base than focusing on solutions. The result is an erosion in trust in public officials, Sampson said, urging insurance industry leaders to fill that void by seeking bipartisan solutions.

Dave Evans is a senior associate with insurance marketing firm Aartrijk, based in Fairfax, Virginia.