Article

Executive Summary

Third-party litigation funding is changing how lawsuits are fought in America—and not always for the better. This fast-growing industry allows outside investors to pay the costs of lawsuits in exchange for a share of any payout. While it can help some plaintiffs access the courts, it has also fueled longer cases, higher settlement demands, and record-breaking jury awards known as “nuclear verdicts.” These costly outcomes have driven up insurance premiums and made coverage harder to find for many businesses.​

For responsible companies, captive insurance offers a way to regain control. A captive is a form of self-insurance that allows a business to fund and manage its own risks. By using a captive, organizations can control claims more effectively, isolate litigation exposure from market swings, and keep premium dollars working for the business instead of commercial insurers. In a landscape where third-party investors are making lawsuits more unpredictable and expensive, captives give businesses a smarter, more stable way to protect their balance sheets and their future.

Third-Party Litigation Funding: A Growing Challenge to Insurance—And Why Captives Offer a Strategic Solution

For sophisticated businesses, understanding the forces driving insurance costs upward has never been more critical. One of the most significant—yet often overlooked—factors reshaping the liability landscape is third-party litigation funding (TPLF). This multi-billion-dollar industry is quietly fueling nuclear verdicts, prolonging litigation, and creating volatility across commercial insurance markets. For businesses committed to controlling their total cost of risk, captive insurance offers a powerful countermeasure.​

Understanding Third-Party Litigation Funding

Third-party litigation funding is a financial arrangement in which outside investors—hedge funds, private equity firms, or specialized litigation finance companies—provide capital to plaintiffs or their attorneys in exchange for a share of any settlement or judgment. These agreements are typically non-recourse, meaning if the case fails, the funder receives nothing. The industry has experienced explosive growth, with commercial litigation investments in the United States alone estimated at $15.2 billion, and total funding investments projected to reach $18.9 billion in 2025.​

What makes TPLF particularly concerning is its opacity. Most jurisdictions do not require disclosure of funding arrangements, leaving defendants and their insurers unable to assess the true financial backing behind claims. Only seven states currently regulate litigation funding with disclosure requirements.​

The Damaging Impact on Commercial Insurance

The proliferation of third-party litigation funding is exerting significant pressure across the insurance industry, with consequences that ultimately flow through to policyholders in the form of higher premiums and reduced coverage availability.​

Fueling Nuclear Verdicts

TPLF is widely recognized as "the jet fuel funding megaverdicts". By providing plaintiffs with virtually unlimited financial resources, litigation funders enable aggressive legal strategies and prolonged litigation that would otherwise be financially untenable. Between 2010 and 2018, the average verdict for claims exceeding $1 million increased tenfold. These outsized awards have contributed significantly to social inflation—the rise in insurance claims costs beyond economic inflation.​

Eliminating Settlement Incentives

Traditional contingency fee arrangements created natural incentives for efficient resolution. Plaintiffs' attorneys bore financial risk and had motivation to settle cases quickly when appropriate. TPLF fundamentally alters this dynamic. When outside investors fund litigation with expectations of substantial returns, the pressure to settle for reasonable amounts diminishes. Funders seek maximum returns on their investments, which can mean pursuing cases longer and demanding higher settlements than the actual damages warrant.​

Increasing Frivolous Litigation

With access to external capital, plaintiffs can pursue low-merit cases that would otherwise never proceed. Insurance companies face a difficult choice: spend time and money defending against questionable claims, or settle to avoid mounting defense costs and the risk of an outsized verdict. Either option increases insurers' expenses and, consequently, premiums for policyholders.​

Creating Unpredictable Loss Development

Insurers base premiums on anticipated risks and predicted losses. When TPLF enters the equation—often without disclosure—claim costs can escalate unpredictably. This makes it extraordinarily difficult for insurers to accurately price risk, leading to conservative underwriting, reduced capacity in certain lines, and significant rate increases.​

The numbers tell the story. Between 2018 and 2023, litigation management costs for the combined property and casualty industry increased by 19%, amounting to an increase of $4 to $5 billion. The top 50 insurance carriers spent an average of $500 million on litigation expenses in 2022 alone. These costs don't disappear—they're passed directly to policyholders through premium increases and reduced coverage availability.​

How Captive Insurance Provides Control and Insulation

For high-performing businesses seeking to insulate themselves from the distortions TPLF creates in the traditional insurance market, captive insurance represents a sophisticated risk management solution. Rather than remaining at the mercy of volatile commercial insurance markets increasingly shaped by litigation funding, captives offer control, customization, and the ability to retain value within your organization.

Customized Claims Management

Unlike commercial insurers who may prioritize their own economic interests over yours, captives give you direct control over claims handling strategies. You decide when to settle and when to fight. If you believe a claim is frivolous and settling will encourage additional meritless suits, your captive can commit resources to mount a vigorous defense without needing approval from a third-party carrier. This autonomy is particularly valuable when facing TPLF-backed plaintiffs who may be pursuing questionable claims funded by deep-pocketed investors.​

Strategic Risk Retention

Captives enable you to retain risks that are either uninsurable or prohibitively expensive in the commercial market. By moving certain liability exposures into your captive—particularly those lines most affected by litigation funding such as auto liability, general liability, and product liability—you can isolate these risks from the volatile pricing cycles driven by nuclear verdicts elsewhere in the market. Premium dollars that would have been lost to commercial insurers remain within your organization, available to pay legitimate claims or build reserves.​

Insulation from Market Volatility

The commercial insurance market operates in cycles, with pricing heavily influenced by industrywide loss trends. When TPLF-fueled verdicts drive up losses for carriers, all policyholders in affected lines face premium increases—regardless of their individual loss history. Captives break this cycle by allowing you to price your own risk based on your actual exposure and claims experience, not the industrywide impact of litigation funding. Over time, this provides greater certainty of insurance spend and insulates your organization from market disruptions.​

Alignment of Interests

Commercial insurers face inherent conflicts of interest. They may settle claims you'd prefer to defend, or select defense counsel based on cost rather than quality. Your captive's interests are perfectly aligned with yours. Every dollar saved on claims, every frivolous lawsuit successfully defended, every improvement in safety and risk management directly benefits your organization. There's no third-party insurer extracting profit from your premium dollars.​

Enhanced Due Diligence on Claims

When your captive handles claims, you can implement more rigorous investigation and evaluation processes than commercial insurers typically deploy. This is particularly important when facing TPLF-backed claims that may be built on inflated damages or speculative theories of liability. Your captive can invest in thorough defense strategies and expert analysis without the constraints commercial carriers often face.​

Take Charge of Your Risk

Third-party litigation funding represents a fundamental shift in the litigation landscape, one that commercial insurance markets are struggling to manage profitably. The resulting premium increases, capacity constraints, and reduced coverage options leave traditionally insured companies exposed to forces largely beyond their control.

Captive insurance offers a different path—one built on control, customization, and premium retention. Rather than viewing insurance as a sunk cost that funds the litigation finance industry's returns, sophisticated businesses are leveraging captives to take charge of their risk, make strategic claims decisions aligned with their business objectives, and retain underwriting profits within their own organizations.​

As the year draws to a close and you prepare for your renewals, now is the time to explore whether a captive insurance strategy could help your organization better manage the challenges TPLF and other market forces present. The traditional purchase of insurance is one of the worst investments that well-managed clients make each year. A properly structured captive can transform that cost into a strategic asset.