TPLF - Do's and Don'ts
Today's Social Inflation Insight focuses on the regulatory effort to tackle systemic issues around third-party litigation funding (TPLF). For those unfamiliar, TPLF refers to outside stakeholders providing funding for a plaintiff in hopes that the case will yield a financial return. Problematically, most states don’t require the disclosure of such funding arrangements—even to the courts.
Many factors contribute to social inflation, but one critical aspect is the growing transformation of litigation into a new type of investment class. TPLF has created serious problems for the justice system, and lawmakers are increasingly taking an active role in addressing the issue.
As we’ve covered in a previous newsletter, many state legislatures have considered TPLF-reform legislation. In fact, Illinois just signed one into law. Before the last state legislatures wrap up their sessions, let’s explore the “dos and don’ts” of TPLF legislation, using Illinois as a case study.
The Illinois legislation that became law has some similarities to reforms passed by Wisconsin in 2018 and West Virginia in 2019. The insurance industry advocates for two essential components in TPLF legislation:
Unfortunately, the Illinois law lacks the measures necessary to bring practical improvements to the state's legal system.
- Concrete disclosure requirements in all civil litigation
- Safeguards to prevent abuses and address them when they occur
In particular, the Illinois legislation does not require disclosure of third-party funding in the litigation, and it falls short of providing adequate consumer safeguards. For example, plaintiffs could be exploited with interest rates multiples of the 18% maximum codified in the Illinois legislation. This type of oversight could clearly do more harm than good.
Transparency must be at the center of all TPLF reform efforts to effectively limit the corrosive influence that unfettered anonymous funding can have on court proceedings. If a court doesn't know who is funding a case, it can't make a nonpartial assessment of the facts.
It's clear that simply calling a bill “TPLF reform” doesn’t make it so. For a bill to be effective, it must codify transparency for the consumer to have any chance of success.