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Jas Braich, Cox P.L.L.C. (Managing Partner – Dallas) (guest contributor)
Third-Party Litigation Funding or Third-Party Litigation Financing (TPLF) refers to a financial arrangement that has been around for centuries and can trace its roots back to medieval England, when concepts called Champerty and Maintenance were prohibited to prevent wealthy nobles from meddling in vexatious claims in return for a share of the profits or to bankrupt a rival.
Over the last quarter century, TPLF has experienced explosive growth throughout the globe, and in the U.S. in particular. Initially, TPLF was used in the commercial sector in highly complex commercial litigation, and in the consumer sector in class action lawsuits. Over the past decade, however, TPLF has become increasingly commonplace in personal injury lawsuits.
With little knowledge about TPLF and a lack of consistent laws requiring disclosure, TPLF has created another challenge for companies, defense counsel, and claims handlers in evaluating, defending, and resolving claims.
What exactly is TPLF, and more importantly, what role will it play in the expanding world of modern dispute resolution?
This article provides an overview of what TPLF is, including some of the legal and ethical implications it raises, and the challenges it brings for claims handlers.
TPLF is a rapidly evolving financial arrangement that allows individuals or entities involved in legal disputes to obtain capital from an outside party – one that is not directly involved in the case – in exchange for a beneficial interest in the outcome of the litigation.
Although “contingency fees” are a form of funding by non-parties, TPLF refers to funding provided by companies or individuals on a non-recourse basis, in exchange for a share of the settlement or judgment proceeds.
In high stakes commercial litigation cases and large class actions lawsuits, TPLF is often used to pay for lawyers, experts, advertising, and other case-related expenses. With huge money to be made, investors, private equity groups, and hedge funds are willing to front millions of dollars to fund these lawsuits.
With the rise in nuclear verdicts and nuclear settlements, however, funding personal injury lawsuits has become almost as lucrative as funding a lengthy class action lawsuit.
Social inflation and increasing settlements and verdicts have caused “capital” companies to pop up everywhere. These companies specialize in vetting and evaluating personal injury cases (often hiring attorneys to evaluate cases) and investing capital in the cases that they believe have the largest potential for return.
Proponents of TPLF argue that it provides more access to the courtroom for plaintiffs and helps level the playing field. For example, a plaintiff with a meritorious case may feel compelled to take a quicker or lower settlement because they need money for medical bills and living expenses and cannot wait the two-to-three years the case may take to go through the litigation process. TPLF can be used to help provide the plaintiff the resources they need during the pendency of the case.
In addition, unlike a conventional loan, if the lawsuit fails, the plaintiff will not be required to pay the money back to the funder. There are no credit checks, no out-of-pocket payments, no restrictions on how the money is used, and nothing is due until the case resolves. TPLF shifts the risk away from the plaintiff and to the funder.
If TPLF sounds too good to be true, that is because it is. For the typical personal injury case, funding will likely be a small amount (typically $10,000.00 or less). Funders will typically fund 7%‑10% of the value of the case.1 In addition to evaluating liability, funders also consider factors such as the amount of insurance proceeds and the net worth of the defendant when determining whether to fund a case.
The problem arises when it comes time to pay back the funders. When the plaintiff wins a funded case, the funder will take its cut of the winnings before the plaintiff is paid – often 20%‑40% of the proceeds of the case, or even more.2 This does not include interest, which could be 20% or more at a compounding rate. Funders argue that they are not subject to usury laws because the advanced money is not a loan and does not involve an absolute obligation to pay.
Based upon this formula, with a plaintiff having to pay 33.33%‑40% contingency fees to their attorney, 20%‑40% to the funder, 20% interest on the advancement, plus reimbursing medical bills and case expenses, a plaintiff could be left with little or no recovery. In other words, the attorneys, the funders, the doctors, and the expert witnesses will all make money at the expense of the plaintiff; however, the actual injured plaintiff may take home only a fraction of the settlement.
With funders operating secretly and with no mandatory disclosure, it is very difficult to determine how much Third-Party Litigation Funding is taking place. Recent estimates show that TPLF has experienced explosive growth and is now a multibillion-dollar industry worldwide, with an estimated $15.2 billion in commercial litigation investments in the U.S. alone.3 This growth can be attributed to law firms and plaintiffs becoming more familiar with TPLF and more comfortable using it. TPLF companies are also establishing business practices, advertising, strategies, and technologies to make TPLF more mainstream.
The real reason it has become so popular, however, is because the funders are realizing a high rate of return. TPLF has become an attractive market for investors because returns are uncorrelated to the price movements of other investments or the stock market.4 Litigation occurs in markets that trend upward or downward and does not depend on macroeconomic factors.5 Commercial funders have reported upwards of a 91% to 93% return on invested capital on concluded assets.6
Simply put, litigation funders are not altruistic investors. They have one goal: to maximize profits regardless of the effects on the litigants whose claims they seek to profit from.7
In addition to reptile tactics and social inflation, TPLF is making resolution of claims more difficult and more expensive, especially with respect to premises liability claims and commercial motor vehicle accidents. One study of roughly 200,000 cases from a single large consumer funder over a 10‑year period found that about 59% of their cases involved motor vehicle accidents.8
TPLF is having a profound effect on claims handling and litigation, including the following:
Multiple states have enacted legislation to regulate the TPLF industry, including everything from disclosure of the third-party litigation funder to the specific details of funding contracts.
Georgia, Indiana, Kansas, Louisiana, Montana, West Virginia and Wisconsin
Arizona, California, Colorado, Delaware, Florida, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Missouri, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, Oklahoma and Rhode Island.
As efforts to regulate the TPLF industry progress at the state level, the U.S. House of Representatives is advancing H.R. 1109-The Litigation Transparency Act of 2025 – which would regulate third-party litigation funding in federal court cases.
Countering the potential effects of TPLF (higher settlement values, expectations and extensive litigation) will require a collaborative effort between the insured, claims professional, defense counsel, and the legislature.
Insureds need to ensure they have above-average safety protocols, training, and operational policies. For example, a commercial motor carrier may want to ensure that it has updated safety manuals and policies, ongoing safety training, organized maintenance records, dash cameras, electronic logs, and satisfactory ratings. Dash cameras, in particular, can be particularly useful in fighting frivolous claims.
Insurers and claims professionals will need to scrutinize each claim to identify claims with a high probability of TPLF involvement. Specific factors may include the claimant’s age, location, and employment status; the potential damages; the claimant’s law firm; and the amount of available insurance proceeds. For example, a young claimant who is unemployed, does not own a home, does not have higher education, lives in a liberal venue, and only complains of soft-tissue injuries in an accident involving a trucking company with a commercial policy may have a high probability to TPLF involvement.
Claims professionals should also conduct an extensive investigation as soon as the claim comes in, even in cases that were once considered small or low liability. The investigation may include background research, social media canvassing, asset searches, ISO insurance investigations, witness interviews, and surveillance. In cases where liability is clear, the claims professional should attempt to resolve the claim quickly before litigation funders get involved or before funding inflates the claimant’s expectations.
Defense counsel must also be able to quickly recognize those cases where TPLF may be involved. In addition, defense counsel must be able to provide the insurance carrier with accurate assessments and evaluations, including factors such as the plaintiff’s law firm, the venue, and the presiding judge. In cases with clear liability, defense counsel must advocate for early resolution, including the use of mediation or alternative dispute resolution. Instead of using boilerplate defense strategies, defense counsel must also use tailored discovery, take strategic depositions, file procedural motions, utilize key medical experts, and conduct surveillance to argue that the plaintiff’s claims are exaggerated or unrelated and challenge plaintiff’s credibility.
Each state’s legislature must continue to push for tort reform, including regulating TPLF and requiring mandatory disclosure.
As TPLF grows in prevalence across all areas of litigation, it will continue to present challenges for claims professionals who are responsible for evaluating claims, determining liability, and negotiating settlements. Strategies including aggressive investigation, early resolution attempts, and focused litigation can help mitigate the effects of TPLF.
Jas Braich
COX P.L.L.C.
Jas Braich is Managing Partner with Cox P.L.L.C based in Dallas. Cox P.L.L.C. is a law firm delivering legal services to businesses and private clients. With a team of more than 50 litigators, counselors, and trial attorneys licensed in more than a dozen states, they work together to preserve equity, eliminate risk, and resolve disputes for their clients. Learn more and contact them at coxpllc.com.
