Article

Third-party litigation funding has grown, over a relatively short period, from a niche financing arrangement into a meaningful force shaping the litigation environment and, by extension, the cost of insurance. It tends to operate out of view, rarely discussed by the parties whose cases it supports, yet its influence reaches into the very loss trends that captive owners watch most closely. For organizations financing their own risk, it is worth understanding what this capital does, why it has attracted steadily growing concern, and why a recent development in North Carolina has captured the industry's attention.

What Third-Party Litigation Funding Is

At its simplest, third-party litigation funding (TPLF) is an arrangement in which an outside investor, often a specialized fund or PE Firm, provides capital to a plaintiff or a law firm to pursue a lawsuit. In return, the funder receives an agreed share of any settlement or judgment. The funder is not a party to the dispute and, in most arrangements, holds no interest in the underlying matter beyond its financial return. An ethically questionable proposition in my eyes.

Supporters describe the practice as a way to broaden access to the courts, allowing claimants who could not otherwise afford prolonged litigation to pursue claims they believe are meritorious. That is a fair description of how funding can work in individual cases, and it is the framing most often offered in its defense. Yet alongside that account, a steady and growing chorus of insurers, defense counsel, and policymakers has voiced a more cautious view.

The Concerns

The unease around TPLF is less about any single arrangement and more about the cumulative direction it nudges the system. The concerns most frequently raised tend to cluster around a handful of themes.

• Limited transparency. In many jurisdictions, the existence of a funding arrangement need not be disclosed to the defendant, the court, or the jury. Decisions that shape a case may be influenced by a party whose role is never made visible, which sits uneasily with the usual expectation that the interests behind a lawsuit are known.
• Prolonged disputes. When an outside investor is seeking a return, there can be less incentive to settle a claim early and reasonably. Cases that might once have resolved quietly may instead be carried further, adding time, cost, and uncertainty for everyone involved.
• Upward pressure on awards. Funding is widely viewed as one of several contributors to so-called social inflation — the gradual climb in the size of liability verdicts and settlements beyond what economic inflation alone would explain. By financing larger and longer claims, the practice can quietly raise the ceiling on what disputes ultimately cost.
• Questions of control and alignment. Where a funder has a significant financial stake, concerns arise about whether litigation strategy is being guided by the claimant's genuine interests or by the investor's return profile. The two are not always the same.
• The source of the capital. Because funding arrangements are often opaque, there has been growing discomfort about who, ultimately, is financing litigation — including the possibility of capital originating well outside the parties or even the country in which a case is heard.

The North Carolina Development

This backdrop is what makes a recent step in North Carolina notable. In June 2026, Governor Josh Stein signed into law House Bill 315, the Prohibit Litigation Investments Act — described as the first measure of its kind in the nation. Rather than the disclosure-oriented approach other states have generally pursued, the law makes it unlawful to engage in litigation investment, or to furnish such investment to a party or to counsel of record in a civil proceeding in the state.

The statute carries real teeth. It authorizes the state's attorney general to bring action against violators, and it allows an injured person to recover treble damages measured against the full potential investment the funder had contemplated. Notably, the bill drew broad bipartisan support: it passed the state House unanimously and cleared the Senate with a single dissenting vote, reflecting a level of agreement that is uncommon for any contested policy question.

The measure also arrives within a wider current of activity. National business groups, including the U.S. Chamber of Commerce's Institute for Legal Reform, championed the law — its president, Stephen Waguespack, framing it as a bulwark "against shadowy investors who bankroll litigation for profit." At the federal level, disclosure-focused legislation introduced in early 2026 by Senate Judiciary Chair Chuck Grassley has met resistance from lawmakers across the aisle, while other states — California, Colorado, and Illinois among them — weigh their own limits on how much influence outside investors may hold over a lawyer's practice.

It is worth noting that the legal and regulatory picture here remains in motion and varies considerably by jurisdiction. The treatment of litigation funding differs from state to state, measures of this kind frequently attract legal challenge, and the practical effect of any prohibition depends on how it is drafted, interpreted, and ultimately enforced. The discussion above is offered as directional context rather than a settled account of the law.

Why It Matters for Captive Owners

For organizations that finance their own risk through a captive, litigation funding is not an abstract policy debate — it is one of the forces sitting behind the loss trends that determine whether a program performs as expected. The liability lines most exposed to social inflation are also the lines where captives most often participate, and the same pressures that strain the commercial market eventually find their way into retained layers.

A captive that writes or reinsures liability exposure benefits from understanding that the litigation environment is not static, and that the cost of a claim today reflects forces that have little to do with the underlying facts of the loss. That understanding argues for the disciplines captives should already be practising: conservative reserving that reflects current verdict trends rather than historical averages, well-calibrated reinsurance to absorb the tail of an outsized award, and a clear-eyed view of where severity risk is best retained and where it is better ceded to the broader market.