Every year, more than 400,000 civil cases are filed in US federal and state courts, according to USCourts.gov. Increasingly, the named parties in those cases aren’t the only ones with money on the line. A largely unregulated, multibillion-dollar industry called third-party litigation funding (TPLF) is quietly financing an outsized share of the lawsuits driving up claims costs across the P&C insurance industry — and in 2026, regulators are finally starting to catch up.
What Is Third-Party Litigation Funding?
Third-party litigation funding is the practice of outside investors — hedge funds, private equity firms, and specialty litigation funds — financing a plaintiff’s lawsuit in exchange for a cut of any settlement or judgment. As Swiss Re describes it, litigation funding companies “invest in consumer and commercial litigation by funding legal action in return for a percentage of a successful claim sum.”
Unlike a traditional contingency-fee arrangement between a plaintiff and their attorney, TPLF brings in a party with no direct stake in the case’s facts — only its financial outcome. That changes the incentives. A funded plaintiff has less financial pressure to settle early, and a funder has every incentive to see the claim maximized, not resolved quickly.
The Scale of the TPLF Industry
Estimates of the industry’s size vary by source and methodology, but the direction is consistent: it’s large and growing. Global litigation funding investment was estimated at roughly $17 billion as of 2021, according to NAIC, and more recent industry analysis projects global annual investment reaching into the low-$30 billions by the end of the decade. On the cost side, EY’s analysis projects TPLF could add as much as $50 billion in costs to the US insurance industry over five years — a 4% to 5% increase in annual loss ratios.
Regardless of which figure you use, the trend line is the same one driving social inflation more broadly: claims costs rising faster than economic inflation would explain.
TPLF’s Fingerprints on Nuclear Verdicts
The connection between litigation funding and outsized jury awards, often called “nuclear verdicts,” is well documented. The Casualty Actuarial Society and the Insurance Information Institute have found that social inflation increased commercial auto liability claims by more than $20 billion between 2010 and 2019 — and TPLF is one of the most-cited contributors.
The trend has only accelerated. Nuclear verdicts — generally defined as awards exceeding $10 million — rose roughly 52% in 2024 to about 135 cases totaling an estimated $31.3 billion, with commercial auto liability, product liability, and general liability among the hardest-hit lines. TPLF complicates matters further for insurers and actuaries alike: because funding agreements are rarely disclosed, claims and reserving teams often can’t tell which cases in their pipeline are funded until the litigation posture — refusal to settle, unusually aggressive discovery, drawn-out timelines — makes it obvious.
2026 Is the Year Regulation Catches Up
For years, TPLF operated with almost no disclosure requirements. That’s changing fast.
Federal action: On February 11, 2026, Senators Chuck Grassley, Thom Tillis, John Kennedy, and John Cornyn introduced the Litigation Funding Transparency Act of 2026 (S. 3826). The bill would require disclosure of third-party funders and their funding agreements in federal class actions and multidistrict litigation, and would bar funders from controlling litigation strategy or accessing confidential discovery materials. It’s currently before the Senate Judiciary Committee. This isn’t the bill’s first attempt — earlier versions date back to 2019 — but the 2026 version has more industry backing behind it, including public support from APCIA and NICB.
State action: States aren’t waiting on Congress. Georgia’s TPLF registration law took effect January 1, 2026, requiring litigation funders to register with the state’s Department of Banking and Finance and exposing them to joint-and-several liability for frivolous litigation. Other states have introduced or passed similar disclosure and registration requirements, and courts in jurisdictions like New Jersey have adopted their own transparency orders requiring disclosure of funding agreements in individual cases.
The debate isn’t settled. Consumer advocates and some legal scholars argue TPLF gives under-resourced plaintiffs access to justice they otherwise couldn’t afford, and that transparency rules risk chilling legitimate claims. Critics counter that TPLF’s non-recourse structure removes any incentive to settle reasonably, extends litigation timelines, and — per reporting from the New York Post — has in some cases charged plaintiffs interest rates as high as 124%, leaving them with as little as 43% of their own settlement after paying the funder.
What This Means for Claims Teams
Regulation will help with transparency, but it won’t reverse the loss trend overnight — insurers and TPAs need to adapt claims operations now, not wait for Congress. A few practical moves:
- Flag litigation-funding indicators early. Refusal to engage in early settlement discussions, unusually aggressive discovery demands, and prolonged timelines on cases that should be straightforward are all soft signals worth tracking in your claim file from first notice of loss onward. A configurable claims management system lets adjusters tag and monitor these patterns systematically instead of relying on individual case memory.
- Tighten reserve discipline on exposed lines. Commercial auto, general liability, and other lines most affected by social inflation need more conservative reserving assumptions and closer monitoring as cases develop — this is where strong enterprise claims management software with real-time reporting earns its keep.
- Move fast on the claims you can control. You can’t control whether opposing counsel is funded, but you can control your own claims cycle time. A slow, manual claims process gives litigation more time to take root before a fair resolution is even on the table. AI-assisted claims triage and automated claims workflows help adjusters move quickly on the claims that are still resolvable before they escalate.
- Build litigation-pattern visibility across your book. TPAs and carriers handling volume across commercial auto and general liability benefit from claims software that surfaces litigation trends across the portfolio, not just file by file.
Is Your Claims Operation Ready for a Harder Litigation Environment?
Third-party litigation funding isn’t going away, and neither is social inflation. What insurers, TPAs, and adjusting firms can control is how efficiently and proactively their claims teams respond. VCA’s claims management software gives claims teams the automation, reporting, and reserve visibility they need to move fast, catch red flags early, and keep litigation-prone claims from spiraling. Explore how our claims management software supports carriers, TPAs, and independent adjusting firms navigating a harder casualty market — or request a demo to see it in action.
If you haven’t already, subscribe to the VCA Software blog below — we’ll keep tracking this issue as the 2026 legislative session moves forward.
