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What Independent Agents Should Know About Third-Party Litigation Funding

A new trend affecting the insurance industry is third-party litigation funding, or TPLF. The US government defines TPLF as “an arrangement in which a funder who is not a party to the lawsuit agrees to help fund it.” More lawsuits are being funded by these third parties, but the rules around their usage haven’t kept up.

Because the threat of litigation is always a factor for insurance companies, litigation funding can have widespread implications for the industry — and for independent agents and brokers.


The Impact of Litigation Funding on the Insurance Industry

Some of the challenges with third-party litigation funding include the lack of transparency in the transaction. This means the people or entities funding lawsuits are not known by the parties to the lawsuit. Traditionally, the individuals and parties involved with litigation get listed on the paperwork filed with the lawsuit. But TPLF takes away that transparency.

Another concern is that litigation funders could use their dollars to sway outcomes and legal processes, funding those cases they want to see go to trial. And since litigation funders could be anyone, located anywhere in the world, questions arise around their motives. Those funding lawsuits often do it to make money, like any other investment. But it is possible more nefarious motives, like swaying court decisions and pushing lawsuits to meet various interests, will prevail.

The popularity of third-party litigation funding is rising, especially in the United States. A report by the Swiss Re Institute found a total investment of $17 billion in TPLF in 2021, with over half of these funds going to support litigation in the US. And with a consistent 16% increase year over year, third-party litigation funding is on the rise.


Independent Agents and Brokers Are Affected by Litigation Funding

It isn’t just insurers that need to consider the impacts of third-party litigation funding. Agents and brokers will feel the impact of the rise in litigation dollars, too. More litigation funding means more lawsuits may result in trials rather than settlements. Longer settlement and trial times cost insurance companies money in held reserves, defense costs, and adjuster time.

This means a claim on an agent’s book of business may remain open longer, sometimes for years, waiting for litigation to resolve. And the payout may be higher than anticipated, as well. These factors affect the agency and agent over time.

Policyholders may not understand why litigation can sometimes take years to resolve, which can add to their stress over the lawsuit. As their agent, they will often come to you for answers and reassurance — and may often become frustrated by delays and concerned about increased costs. Agents may need to spend more time with these affected policyholders than usual.

Administrative costs will be greater for the agency as files need to stay open longer, with all the associated maintenance costs. Letters updating the policyholder and time spent requesting information from the carrier add to the costs.

The industry will also likely see restrictions or changes in third-party litigation funding as it catches up to this new trend. These changes could lead to greater transparency in the process but could also cause greater challenges for policyholders and defendants.

While third-party litigation funding can cause challenges for the industry, independent agents can prepare for these types of claims on the books by taking proactive steps to manage risk. Try these tips:

  • Learn about third-party litigation funding and educate others in your agency.
  • Stay up to date with regional news about litigation funding trends in your area.
  • Talk with impacted policyholders and remain available to help answer questions.
  • Review your book of business to consider how TPLF could affect it.
  • Check your E&O coverage to be sure it is sufficient for your ongoing exposures related to litigation funding and any other changes to your business.


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