Litigation Investment Safeguards and Transparency Act
Statement from:
Marc Hyden, Director of State Government Affairs, R Street Institute
Statement on SB 1276: “Litigation Investment Safeguards and Transparency Act”
January 22, 2024
Senate Judiciary Committee
Chairman and members of the committee,
My name is Marc Hyden. I am the director of state government affairs at the R Street Institute, a nonprofit, nonpartisan public policy research organization. Our mission is to engage in policy research and outreach to promote free markets and limited, effective government in many areas, including property and casualty insurance and tort reform. That is why SB 1276 is of special interest to us.
Despite enacting insurance and tort reforms in recent years, Florida is still facing many challenges, and lawsuit abuse continues to hurt consumers and imperil the insurance market. There is no single silver bullet that can fix these problems, but it is possible to identify one of the drivers: abuse of commercial third party-litigation financing, which “allows hedge funds and other financiers to invest in lawsuits in exchange for a percentage of any settlement or judgment,” reads a U.S. Chamber of Commerce Institute for Legal Reform primer.
When exploited and misused, it in essence serves as a moral hazard that encourages more, expensive lawsuits as numerous parties seek a payday and bog down the legal system. Since its inception in the U.S., third-party litigation financing has fast become big business. “With recent annual returns surpassing 20%, it’s not difficult to see why investors are making third-party litigation funding (TPLF) one of the fastest-growing alternative asset classes,” wrote the Insurance Information Institute (III).
While the full scope and impact of third-party litigation financing isn’t known because of a lack of transparency, it is undoubtedly growing. A Westfleet Advisors report identified 47 third-party litigation funders in 2021. In 2019, there were only 41. Moreover, these funders had in 2021 around 32 percent more combined assets under management than they did in 2019—reporting $12.4 billion in 2021, which demonstrates the exploding business.
Supporters of third-party litigation financing cite its use as a method of leveling the playing field with big companies. In theory, it can help accomplish this, but as III claims, it doesn’t always work this way in practice. “[It] is no longer about David vs Goliath, but about speculative investors getting richer as they focus on cases more likely to win the big settlements,” wrote III. What’s more, instead of exclusively aiding “the little guys,” “Among all 2021 portfolio commitments, 53% were earmarked for big firms. That amount was a seismic increase (up 488%) from 2020,” III continued.
It’s widely understood that lawsuit abuse and third-party litigation financing has an outsized impact on Americans. As the data show, increased litigation leads to increased business costs—particularly affecting property and casualty insurers who defend against all forms of lawsuits—frivolous and legitimate.
In a phenomenon known as social inflation, companies then raise their prices to defend against baseless lawsuits and pay out nuclear verdicts of over $10 million. A 2021 estimate suggested that the Floridians pay a “tort tax” of over $800 a year. That number has certainly grown since then—exacerbating the debilitating inflation rates plaguing Americans the past few years. With nearly 13 percent of Floridians living in poverty, this “tort tax” can mean the difference between putting food on the table or going hungry.
It’s critical that plaintiffs and defendants both receive fairness in the justice system and that large entities cannot run roughshod over “the little guy.” While third-party litigation financing is not intrinsically bad—rather it can help level the playing field—leaving it unregulated and unpoliced can have negative consequences.
SB 1276 looks to help curtail commercial third-party litigation financing, stabilize the insurance market and aid consumers who are already feeling the pinch of social inflation. It would do so without banning the practice, but instead requiring more transparency and capping how much litigation financiers can receive.
Thank you for your time.
Marc Hyden
Director, State Government Affairs
R Street Institute
(404) 918-2731
[email protected]