Wide implications of third-party litigation funding

Record date: 1/7/25 
Air date: 1/29/25 

Discover how outside investors impact lawsuits, while examining whether their involvement is a game changer for plaintiffs, a controversial practice or filled with unknown risks. Learn about the challenges, the impact on businesses and the financial toll on everyday consumers. Join Sherman “Tiger” Joyce, President of the American Tort Reform Association (ATRA) and Keith Daly, Chief Claims Officer at Zurich North America, as they explore the complex world of third-party litigation funding.

In this miniseries, the episodes include: 

January 15: 2025 Legislative outlook: Reforming legal system abuse
February 12: Nuclear verdicts
February 26: The role of claims fraud in social inflation
March 12: Plaintiffs’ Tactics
March 26: Premises Liability

Guests:

Sherman “Tiger” Joyce
President
American Tort Reform Association

Sherman Joyce is President of the American Tort Reform Association (ATRA), a national coalition of more than 300 non-profit organizations, professional societies, trade associations and corporations working through in-state coalitions to bring fairness and efficiency to the civil justice system. As President of ATRA, Mr. Joyce is the Association's Chief Executive Officer and a member of its Board of Directors. Mr. Joyce assumed his current position in 1994.

Joyce graduated from Princeton University.

Keith Daly
Chief Claims Officer
Zurich North America

Keith Daly is Chief Claims Officer for Zurich North America, where he is responsible for leading the Claims unit in delivering transactional excellence in claims handling and achieving a consistent level of superior customer service.

Prior to his current position, Daly was President of Personal Lines for Farmers Insurance, where he was responsible for product development, strategy and underwriting efforts for the Farmers Personal Lines, Bristol West and Foremost lines of business. Daly was also responsible for Toggle, Farmers’ subscription-based Renters Insurance program. He also previously served as Chief Claims Officer for Farmers, and before that led their Property and Auto Claims units. Prior to Farmers, Daly served in a number of senior leadership roles with 21st Century Insurance and was the Vice President of Field Claims Operations. His career in the insurance industry began in 1993 as a claims representative trainee at Progressive Casualty Insurance Co. in Atlanta, Georgia.

Daly earned a Bachelor of Science in Economics from Florida State University.

Host:

Al Orendorff
Chief Communications Officer
Zurich North America

Al Orendorff is Chief Communications Officer at Zurich North America, where he is a member of Chief Executive Officer Kristof Terryn’s senior leadership team. He previously held communications leadership positions at Allstate Insurance, Aon Corp., Genworth Financial and Choose Chicago.
Orendorff began his career as a journalist working in television and radio news, including stints at NBC-TV in Peoria, Illinois, Black Entertainment Television, and WBEZ and WGN radio in Chicago. He is based in Chicago.

(PLEASE NOTE: This is an edited podcast transcript, capturing speakers with natural speech patterns that may include incomplete sentences and/or asides, grammatical errors, verbal shorthand and some statements that may be less clear in print.)

Episode transcript:

AL ORENDORFF: What happens when outside investors get involved in lawsuits? Is it a game changer for plaintiffs who lack resources or a controversial practice with hidden risks? And how do these risks affect businesses?

Welcome to Future of Risk presented by Zurich North America. We explore the changing risk and resilience landscape and share insights on the challenges that businesses face to help you meet tomorrow prepared.

Social inflation refers to the rising costs of insurance claims and litigation that go beyond general economic inflation. They're driven by societal factors rather than traditional market forces. Those factors include social attitudes, legal practices, legal system abuse and cultural norms.

In this miniseries, we explore how the impact of social inflation goes beyond the insurance industry and leads to higher insurance premiums for businesses, a strain on the economy and growing financial impacts on everyday consumers. Today, we're continuing that exploration by looking at a topic that's shaking up the legal world. Third-party litigation funding.

I'm Al Orendorff, and today I'm speaking with Keith Daly, Chief Claims Officer at Zurich North America. And Sherman "Tiger" Joyce, president of the American Tort Reform Association (ATRA). Keith and Tiger, welcome to the podcast.

KEITH DALY: Thanks for having us, Al.

SHERMAN "TIGER" JOYCE: Al, thank you. Great to be with you.

ORENDORFF: I said a moment ago that third-party litigation funding is one of the causes of this larger trend of social inflation that we're seeing. Keith, can you start us off by helping define what third-party litigation funding, often known by the acronym TPLF, is?

DALY: I'd be happy to, Al. So, as you said, third-party litigation funding, it's also known as litigation finance. So, it's a practice when an independent third-party provides a financial resource to a plaintiff or a law firm to fund litigation for a share of really the financial recovery. So, I think one important point, it's a non-recourse loan. 

Non-recourse funding is really around that there's some risk to the funder themselves. If there is no recovery that funder is out of their investment. So, the proponents of litigation funding are certainly there, that it balances the playing field. It allows a plaintiff to have the resources to pursue litigation. The folks on the other side of the ledger would really say what it's done is really driving up litigation costs and the duration of litigation because more cases are funders are present where we can't reach a resolution because really the funder is looking for a bigger payday.

It's unregulated in most cases and the funders —because again, it's a non-recourse loan, the returns they're getting are usually in the 30 to 50% range. So, it's not your traditional financing operation.

ORENDORFF: Tiger, from an industry perspective, what does this mean?

JOYCE: Yes, I think —thank you Al, and thank you for letting me join you for this discussion. This is a terrifically important issue for those of us in the legal reform community. I think Keith really hit some of the key points sort of to set the table.

I think that what's important to recognize is that there are really multiple forms of litigation funding. It could be involved in the sort of from the standpoint of whether it's insurers’ or plaintiffs’ lawyers or defendants… you know, some of the sort of smaller personal claims. Somebody might have a workplace injury or slip and fall in the grocery store or a minor auto accident. And, you know, the argument is that while the process moves forward to potentially resolve a claim, people have needs. They have to meet their rent, mortgage payments… just routine expenses.

So, looking for funding to sort of fill that gap up to very sophisticated, private equity and other hedge fund type entities, that invest hundreds of thousands, if not millions of dollars in complex litigation. So, it really sort of spans that whole arena and it's from the standpoint [that] I can say this as someone who went to law school a long, long time ago. This is totally new.

In our history, the legal system - civil justice system - has excluded outside interests, whether it's someone in a slip and fall case or in these private equity cases. So, it's… it's important to recognize, structurally, how important this is. Keith used the term I think it's exactly on point — it's “non-recourse.”

So, these entities or these financial institutions participate really without the sort of guardrails that normally you see with consumers. Particularly in these sorts of consumer type matters. So, it's a fundamental change to civil litigation.

I think to suggest otherwise, which certainly the funders do and it's not necessarily unanimous within the plaintiff's bar, but there's a recognition that this really changes the nature and scope of litigation and a lot of how matters arise and certainly how they're resolved.

ORENDORFF: I think that's an important point that you made about the fundamental aspects of this issue. And I want to dive into that in a minute. But first—and you touched on it a little bit, Tiger—Are there characteristics of a legal case that tend to attract these TPLF funders? And if so, why?

JOYCE: Well, I'll probably give you maybe a little bit more than you’re bargaining for here. But, you know, I testified for a legislative committee in Kentucky, I think in 2023, more about the sort of the consumer side. And, as Keith mentioned, these entities are looking for a return in the 40 to 50 percent range. So, if you borrow $10,000 from them, that's going to accumulate at 40 to 50 percent. That's a pretty healthy rate of return.

The common element of those cases, and I would suggest even the private equity funded matters, is they do a lot of research and they think they're going to win. This is not a case of, you know, investing in coin flips, where it's maybe it's going to turn out well or not. They're expecting success and they would admit that their success rate is quite high. So, I think that's an important factor to contemplate.

I think that it attracts all kinds of cases, whether it's some of the smaller claims for slip and fall, auto accident type matters involving someone trying to make up for short term economic needs. But one of the areas that we've really seen this is in what we call the mass torts area. That is where major financial institutions, hedge funds, private equity firms are really investing in actual litigation. And if you watch on television, you see ads for pharmaceutical products, asbestos, Roundup, etc. A lot of those ads are really underwritten by the prevalence of these litigation funders.

It really helps to establish this really pernicious issue of these mass toward abusive cases that we see. So, it's really, probably in terms of prevalence… those are the major focus, but it impacts cases from those very large claims with hundreds if not thousands of claimants bringing similar cases down to the individual auto accident or slip and fall type case.

DALY: Yes, and I'd add —jumping in— there is really, I think as you can see, it's no case is sort of immune to having some attractiveness for a funder. I think the challenge for our industry and for businesses and consumers is really the ‘not being aware of it.

So, there is a complete unknown component to when a funder is involved in a case because it's not known to the defendant. There are very few disclosure laws that exist across the U.S. where someone has to say, "Hey, we have entered into this lawsuit."
Typically, a lawsuit is, on its most basic level, injured or damaged party filing suit against the tort fees or the person who has purported to have caused the damage. And so, you sort of have a one versus one, or a corporation versus an individual with the advent of a funder.

You're adding a third party who now has an interest in that plaintiff's case and so our argument really is— because I think the existence of funding is, as it was mentioned, you know— it's new to the litigation environment, but it's so prevalent and it's probably not going away. What we are advocating for is disclosure because you take it to its furthest degree.

The judge who is presiding over a case doesn't know who the parties are and, if there's conflict of interests that could be there that aren't disclosed... they aren't disclosed, so they're unknown. So, it creates a level of uncertainty.

So, we just want to know who are all the parties to a case who is an interest in the case so that the lawyers and the judges can all know that there's a conflict of interest that might exist, that might not be known. So, it's a big part of our advocacy is too, at a state level, to advocate for disclosure laws in every environment in the U.S.

JOYCE: I think you hit the nail on the head, and I try to put myself in the shoes of a judge. A judge wants to make sure, you know… a judge, functioning as he or she should, to ensure that whatever happens in a courtroom serves the interest of the parties and to make sure that he or she understands where the incentives are. And if there is this uncertainty, it really almost raises the question of whose interests really are being served? And that goes back to why this is still new because it does interject as we both discussed this alternate priority or this other entity that factors into the process.

ORENDORFF: Yes, and speaking of awareness… I hear you, Keith, when you're talking about disclosure… I don't know what the rules are. Do we know, can we know who these TPLF funders are?

DALY: Well, the answer today is no. Can we? Of course. But the reality is if there are no mandates or regulations around it, they don't have to disclose it. And so, it is completely blind to the judges, the lawyers, the defendant, the insurance carriers, that they exist.

So, that's the challenge because you just don't know who is in the room and really who is the decision maker before you even get to a courtroom. A lawsuit has a life cycle and there are typically settlement opportunities, mediations, things like that occur, that try to keep things out of a courtroom.

In some cases, the rise of litigation funding, it certainly appears to have changed some of that time and duration where, maybe a value that historically would've been perceived as acceptable to both sides, is now being rejected. And the message clearly being, “We want our day in court, we want to swing from the fences to see if we can get that nuclear verdict that is often talked about because if I'm making the investment, I'm making the investment to try this case for a big return. I'm not trying it, just to compromise a settlement at some point.”

And so, it's a uniqueness that has certainly entered the conversation over the last several years which gets to, ‘there has to be a reason for it and the reason we believe is the litigation funders that are out there, we're just looking to know who they are, what their interest is and disclose it to all parties so that we're all transparently dealing with the issues that we're trying to resolve.

ORENDORFF: It sounds like these funders have no real direct connection with the case. So, what is their incentive to fund litigation in these instances? Tiger, can you take that one?

JOYCE: I think that this is sort of the age-old quest for return on investment. I think the investors are finding it to be a great return. But even this raises the question of, “We don't know because I think with maybe one exception that I'm aware of.” 

Burford Capital, these are private businesses and they're not necessarily going to disclose all of their details. There may be some information out there, but what's the old saying? “Why do you rob a bank?” You rob a bank if that's where the money is. Well, the return on investment obviously appears to be there.

I would add that at least in the so-called “mass torts” world, these major multi-district lawsuits, or class actions, it helps to accumulate more and more claimants and the more and more claimants there are against, whether it's a pharmaceutical product, you know, so-called Roundup and some of these other very prominently advertised cases that that helps to drive up potential settlement values.

I think we could certainly talk for the duration here about the problems with those mass tort cases, in that— to sort of sum it up — oftentimes it's less the underlying claims or nature of the claims or the validity of the claims; it's just the sheer volume helps to drive the cost of resolving these matters.

So, it just sort of perpetuates that issue. We put out a report we call the Trial Lawyer Playbook, which is utilizing the marketing strategy of advertising, where I think the data that we have — well over $2 billion in 2023, the last full year that we have access to — was spent on advertising. You have the prevalence now of the litigation funding, and then the sort of the legal centerpiece is the abuse of expert evidence. In these cases [it] really drives these mass tort matters in these cases that attract a lot of attention.

DALY: Yes, and I'd add to Tiger's point, I mean, I think that when you get the sophistication of a private equity or a hedge fund. They're bringing technology and quant (quantitative) mathematics into the discussion and really providing the plaintiff’s bar an additional resource to build these cases.

I mean, to Tiger's earlier point, they pick cases that they think they're going to win and then they're using all of that technology, AI, etc., to find the appropriate class. And it bleeds into his last point around advertising the spend deafening the amount of money that has been pumped into the market to advertise plaintiff's services, try to find plaintiffs to add on to a product liability case, etc.

Like Tiger was mentioning, the sophistication is driving up ultimate cost to the defendants, which is really gets passed through to consumers, because in any litigation, if a company has to fund you, it ultimately gets added into costs of goods and services. Which we as consumers that buy products from these big corporations ultimately fund. It's quite the vicious circle of cost of goods, because there's a litigation tax associated here in the U.S.

ORENDORFF: So, we're talking about a scenario that has wide ranging implications in the marketplace. So, I guess the logical follow up question is how does it end up affecting businesses and everyday consumers? How does that work?

DALY: Well, I'll take a start at it and Tiger can jump in. I think it gets to that, ultimately any of these dollars, you know a corporation is obviously running for-profit. So, wherever their costs lie, it's part of how they price their goods and services. It's simple, same as a consumer with you their insurance costs. If insurance companies pay more damages out, the price of insurance will go up. It just raises the bar, really, for everything that we interact with as consumers.

So, it is somewhat of an endless cycle, because there is so many cases that are flooding the court systems that's driving up litigation activity over the years. Tiger mentioned where there's more funding. We're seeing more lawsuits and those lawsuits are ending in higher indemnity outcomes for our consumers or our customers.

JOYCE: Yes, I would add that from our standpoint, from the American Tort Reform Association's standpoint, this gets us further and further away from really resolving claims and matters being addressed and handled on the merits.

You know, one of the examples that we would highlight was from several years ago. A multi-district lawsuit involving a blood thinning medication called Xarelto —very popular—Actually spoke to a good friend of mine who's a cardiologist, who said, it's a medication he prescribes regularly for a lot of patients, and it thins the blood. Well, there was a multi-district lawsuit involving the case to sort of net it out. There were thousands of claimants and in handling this, there were, I think, I believe the total was eight bellwether sorts of chosen by both the plaintiff and defense side. Lawsuits were actually litigated to verdict, and the defendants won all of them. They won all eight, I believe it was. It might have been as much as 10.

The net result was the case settled, but it settled for just under $800 million. So, you have to ask yourself the question when you are winning the cases on the merits you have to settle still for nearly $800 million...that just shows the value of generating the volume of claims regardless of the merits. Just imagine what the settlement would be if instead of being for eight, the plaintiffs were two for eight, that it would've probably been $2 billion. You know, I'm just picking that number out of the air.

But back to what Keith was saying, where does that come from? That ultimately, at the end of the day, comes from the consumer. There's not some hypothetical pot of money that's utilized to handle these matters. It comes from the capital of these businesses and they have to achieve a rate of return.

When they have costs, they're going to pass them ultimately on, but getting back to where we can focus on priority claims and ensuring that there are proper incentives here, I think would go a long way. But it begins with, as Keith has highlighted, the need to focus on who is actually at the table and who's making the decisions. And that's where the TPLF really comes into play.

DALY: Yes, and I think Al, one: we haven't really talked about who the funders are because, again there's a couple of known funders that are public about that they offer these services, but most of them are unknown to us. It goes beyond private equity and hedge funds, but it also could include foreign investors. It could include foreign nation states where you really think about the U.S. Stock market and a corporation.

So, somebody could buy into litigation against a corporation. To use Tiger's example, bring a bunch of lawsuits, get them into trial, drive up litigation costs. Those become very public and so you can kind of jump to a nefarious kind of point of view where, I'm trying to affect a stock price of a corporation by targeting them with litigation, making sure that these cases don't settle, that they drag out and then you have a manipulation of our stock market where you could have investors making shorts or longs depending on what your side of the aisle is.

But again, it gets at who really is the party to these lawsuits and what are all of the interests? And it gets to those conflicts that we talked about earlier on. This really gets back to the point of, “I don't believe, and I don't think the industry believes that we are going to stop litigation funding,” because in a lot of cases you can buy into… in some cases that it's appropriate and it's allowing somebody access to justice against maybe a larger defendant, but the element of not knowing about who's in the room.

We are just seeking disclosure. So, we are along with Tiger's organization and most of the industry. We are advocating at every state level to implement some level of disclosure laws and that's really all we're seeking, so that everybody knows who is involved in these matters so that we can find a resolution the best way that we can.

ORENDORFF: You know, over the last several minutes, Keith… you and Tiger have been talking about the complexity of this problem. And it's a wide-ranging implication, which speaks to the importance, seems to me of a collaborative approach to helping to solve it.

I know that Zurich and the American Tort Reform Association are important players in a multi-industry coalition that's actively involved in efforts to create a more fair and balanced legal system. And you talked about that a little bit, Keith. Tell us a little bit about some of the legislation and other efforts that are currently afoot to address this issue.

DALY: Well, this is really up Tiger's Alley with ATRA, but from a coalition perspective, we, along with several of our peer organizations, government relations organizations across the insurance industry and large consumers and a lot of the trade organizations, we've tried to come together to really just focus on where our efforts would be.

And so, this third-party litigation funding is one of our larger things that we are working on trying to push for disclosure laws. Because like I mentioned, you have to do it in every single state. But that isn't only where we're focused. There are certain issues in different markets that we're tackling. There's a premise liability issue in Georgia that has caused outsized outcomes and responsibilities to property owners on certain litigation aspects around liabilities that occur on a property.

That's a specific topic that we are working as an industry to try to impact some change in the state of Georgia. We've had some wins in Louisiana, we've had some wins in Florida as an industry on trying to change the tort environment to either limit time periods or bring cases to resolution quicker. So, it's certainly working with the entire industry and Tiger and ATRA are huge component of that. He [Tiger] can probably cover an entire other podcast of things that we are doing as an industry to try to balance the legal playing field.

JOYCE: Yes. Just to build on what Keith said, I think the challenge here is that you have a dual system, you have the federal courts, and you've got the state courts. As Keith mentioned, for the state courts, which is really, I think quite frankly, where the heavy lifting has to be done, either through the legislative package or perhaps through some rulemaking through the state judiciary or some combination of that, but it's a major focus. I'll make two additional points. Number one is, I think that to meet these challenges, it needs broad based business community support.

Obviously, insurers have all different dimensions, have a profound, obvious interest in the issue. But, so do the medical device, pharmaceutical companies, energy companies, small businesses. Their perspective might be a little bit different. But, who favor a balanced civil justice system and working to achieve that will have an interest in addressing TPLF and ensuring at a minimum — that there is transparency and disclosure of the nature of who's sitting at the table. This is challenging and it's going to require a broad based and diverse coalition of interest to support this. I'm optimistic that it will start to get traction. Then, our experience on matters like this is once that begins, it can sort of generate momentum on itself.

I think also, an important point too is the judiciary is going to take notice of this as well. Certainly, the federal judges recognize that the prevalence of these multi-district lawsuits that are now. I think I've heard figures of well over 80% of their dockets are taken up by these matters. So, from their standpoint, their ability to handle the litigation that is before them is being significantly challenged. And I think there's beginning to be greater recognition of the factors and forces that are leading to that and will serve as an important incentive.

ORENDORFF: So as we wrap, what can businesses do to get involved?

DALY: They can certainly join our coalition. To Tiger's point, an insurer by nature isn't going to move the needle with a lot of legislators or consumers. They kind of view it as, "Hey, you, you took a premium and you took a risk. It's sort of the nature of the business you're in." But, as we know, so many of our customers have such a share of their litigation exposure because they have either high deductibles or programs that are almost self-funded.

So, businesses are incredibly important, as well as they employ so many constituents in a local environment where politicians and regulators need to hear from those local voters on, "This is important to us, and this will help us help our company thrive, that'll hire more jobs, etc." By joining our coalition, and you can you send us an email at LSAcoalition@zurichna.com and we can get back in touch with you when we have events, what we are talking about, how to participate in some of these online sessions. So that you can hear the challenges at a state level that might be more specific to your industry geography that you're in.

JOYCE: Yes, I think I would echo what Keith said, and particularly he made the comment about elected officials. Public officials need to hear about this issue. One of the areas that we at ATRA particularly focus on is making the broader public case. Why is this a problem in terms of just the day-to-day costs? What are the impacts of lawsuit abuse on the average person?

But I think that ultimately has to get translated into clear messages that get to public officials that this is important. A long time ago I worked in as counsel to a committee in the U.S. Senate and one of the things I learned very early on about the trial bar is that they're very focused. They are opposed to reform efforts and are always looking for opportunities to expand their businesses. They don't have 20 issues on their agenda there. So that that amplifies their effectiveness.

There needs to be a counter push to that, to indicate that this is important. Legislators, governors and others need to hear from business leaders that this is important, particular reform and be unified in the push. The other piece to this is: don't let the trial bar sort of split a coalition of business interests and sort of make a deal with Group A to the detriment of Group B within the business community.

So having unity and having that focus is really important. I think Keith made that point. And it can't just be the insurance industry, but obviously the insurance industry has to be a key supporter and advocate. That's if you look at who ATRA is, we range from the American Medical Association, National Federation of Independent Business to major insurer groups, the APCIA and companies like Zurich.

And so, where these are just people serving on the ATRA board of directors. It's a very broad coalition of business and organizational interests that support legal reform. And that's a powerful message in and of itself.

ORENDORFF: Tiger, Keith, thank you for shedding light on this very important topic. And thank you for listening. If you like the show, leave a comment or review wherever you get your favorite podcast, or you can drop us a note at media@zurichna.com.

Stay tuned for our next episode in our social inflation miniseries, where we'll discuss that explosive term nuclear verdicts with Lisa Bellino, Vice President Claims Judicial and Legislative Affairs at Zurich North America. And Rachelle Mortimer, Senior Director of Legislative Affairs at the U.S. Chamber of Commerce. This has been Future of Risk presented by Zurich North America.