US Litigation Funding and Social Inflation: The Rising Costs of Legal Liability

The US is the centre of the world’s third-party litigation finance (TPLF) industry, in which investors such as hedge funds and family offices finance legal action against companies.

Of the USD 17 billion investment into litigation funding globally in 2020, more than half was deployed in the US. Litigation funding companies (LFCs) invest in consumer and commercial litigation by funding legal action in return for a percentage of a successful claim sum.

We see TPLF as a contributor to social inflation in the US, by incentivising litigants to initiate and prolong lawsuits.

Higher claims costs drive up insurance premiums, can reduce the availability of liability cover, and lead to higher uninsured legal liability risks for US businesses. These costs are ultimately paid by consumers.

Our research finds that TPLF contributes to higher awards, longer cases and greater legal expenses. Longer cases increase claim costs, on average, due to higher legal expenses and compound interest on the litigation finance.