American Property Casualty Insurance Association Vice President of Auto and Claims Policy Bob Passmore told Federal Newswire on Aug. 9 that a growing volume of litigation and "unchecked legal system abuse" such as third-party litigation funding (TPLF) and large advertising campaigns are causing car insurance to get more expensive for policyholders.
"Unchecked legal system abuse, and increasing litigation is certainly a significant cost driver for both personal and commercial auto," said Passmore. "Money fueling the mass tort litigation machine has exploded, particularly with the proliferation of litigation financing backing the cases, the advertising and the lead generation. Mass tort legal advertising has seen unprecedented growth, as have nuclear verdicts, especially in product liability, auto accident and medical liability wrongful death and bodily injury cases."
According to the U.S. Chamber of Commerce Institute for Legal Reform (ILR), TPLF involves third parties such as hedge funds or investment firms providing the upfront capital for lawsuits, and in exchange, they receive a percentage of any settlement or award from the case. Without transparency and disclosure requirements, TPLF can influence the course of litigation and incentivize "unmeritorious" lawsuits. The practice is leading to higher costs for consumers because when companies face higher litigation costs due to the presence of TPLF, those companies are forced to raise the prices for their goods and services.
TPLF began growing in popularity in the U.S. in 2010 and has continued to become more prominent due to a lack of regulation, according to a report from the consulting firm Sedgwick. Third-party financiers invested more than $3.2 billion in court cases in 2022, representing a 16% increase from 2021. Sedgwick found that TPLF is contributing to social inflation, or the cost of insurance claims rising faster than overall economic inflation.
During a June Subcommittee on Courts, Intellectual Property, and the Internet hearing, Former Judiciary Committee Chairman Bob Goodlatte said TPLF can create a conflict of interest because parties funding the lawsuit are seeking to make as much money as possible from it. "At times, this may come into conflict with the interests of plaintiffs and prevent plaintiffs and defendants from reaching fair settlements," Goodlatte said. He introduced bills that would require TPLF disclosure while he was in office, stating that the need for that legislation is more urgent now than ever before.
According to the Insurance Information Institute (III), "overzealous billboard attorneys" use large advertising campaigns to attract more clients by promising plaintiffs a "financial windfall," but having more plaintiffs on mass tort cases just serves to make the attorneys more money. III CEO Sean Kevelighan stated: "There are real costs behind what we all know and see plaguing our roads with promises of settlement dollars, as billboard attorneys are racking up fees, and consumers are found to be getting less and less. The price of insurance is the effect, not the cause of risk, and there must be more work done to curb legal system abuse, as auto insurers – both personal and commercial – are seeing significant increases in claims costs when attorneys enter into the picture."
Passmore spent 21 years working in property casualty claims management for Liberty Mutual Insurance before joining APCIA in 2007, according to LinkedIn. He is also an advisory board member for the Insurance Research Council.
