Lions and Tigers and Litigation Funding, Oh My

For CFOs and risk managers, navigating the legal landscape has always been complex.

But the rise of litigation funding is adding a new layer of financial and legal risk that businesses can’t afford to ignore.

Once a tool for cash-strapped plaintiffs, litigation funding has become a weapon of choice for aggressive law firms and opportunistic plaintiffs to bankroll lawsuits against corporations.

While it sounds like an innovative way to share legal costs, it’s turning corporate America into a target-rich environment for ambulance chasers.

First things first: What is litigation funding? ?

It’s when a third party (aka the "silent investor") funds a lawsuit in exchange for a portion of the settlement or judgment.

Litigation funding was designed to help plaintiffs pursue valid claims without depleting their resources, but it’s morphed into something far more problematic.

Today, funders are pouring money into plaintiff-side litigation against businesses, often backing frivolous claims in the hopes of large settlements.

It’s changing the risk landscape for insurers and, by extension, your company.

The Incentive Problem: Funding Frivolous Claims

Litigation funders operate on a simple premise: the bigger the potential payout, the more eager they are to invest.

This is especially true when targeting deep-pocketed corporations.

As a result, businesses are now facing a surge in lawsuits, many of which are speculative at best, driven by the promise of massive financial returns for both the plaintiff and the funder.

For CFOs, this means diverting millions of dollars in legal defense, settlements, or payouts—money that could otherwise be allocated to core business functions like growth initiatives or employee compensation.

How Litigation Funders Undermine Fair Legal Practices

1.?Fanning the Flames of Protracted Litigation: Litigation funders have no incentive for swift resolutions. The longer a case drags on, the greater the potential for a higher settlement. This leaves corporations in a catch-22, often forced to settle just to avoid years of legal costs and reputational damage.

2.?Ambulance Chasing on a Corporate Scale: Third-party funders are increasingly backing opportunistic lawsuits that exploit legal loopholes. Think of it as "corporate ambulance chasing"—these cases are designed to bleed businesses dry, with no downside for plaintiffs or funders. Even if a case is frivolous, companies are often pressured to settle due to the risks of bad publicity and mounting legal fees.

3.?Encouraging Meritless Class Actions: Class actions are on the rise, largely due to the financial backing of litigation funders. With funders encouraging lawyers to take on cases that might otherwise be too risky, CFOs must brace for a wave of meritless lawsuits. These cases siphon off valuable company resources, both in legal expenses and settlement costs.

How Litigation Funding Is Impacting Insurance:

1. Increased Frequency of Lawsuits: ?

When plaintiffs don’t have to foot the bill, they're much more likely to pursue litigation. This means more claims coming your way, which can drive up insurance premiums and potentially lead to more exclusions in your policies. Everyone loves surprise exclusions, right? Yeah, didn’t think so.

2. Higher Settlements: ?

Third-party funders aren’t just in this for kicks—they want a significant return on investment. As a result, they’ll push for higher settlements, increasing the financial exposure for defendants (which might be you!). This also leads to longer, more drawn-out legal battles.

3. Shift in Risk Management Strategies: ?

Traditional risk models might not cut it anymore. Litigation funding introduces a new variable that CFOs and risk managers must account for. It’s no longer just about if a lawsuit will happen—it’s about how much it’s going to cost when that third-party funder is backing it.

4. Reputational Risk:

Lawsuits, even frivolous ones, can damage a company’s reputation. Plaintiffs and funders often leverage the threat of bad PR to extract settlements, knowing that most corporations want to avoid the negative press associated with litigation.

What You Can Do to Stay Ahead:

1. Review Your Insurance Policies: ?Make sure your coverage is up-to-date and comprehensive enough to handle these shifting risks. Litigation funding is growing, and if you haven’t discussed this with your broker recently, it’s time to make that call.
2. Tighten Litigation Management: CFOs need to work closely with legal teams and broker partners to monitor the litigation landscape. Understand the types of cases that funders are targeting and anticipate vulnerabilities that could lead to lawsuits.
3. Budget for Legal Defense: Litigation funding means CFOs must plan for long-term legal battles. Allocating appropriate budgets and resources for legal defense is now more crucial than ever.
4. Mitigate Risks Proactively: Consider alternative dispute resolution strategies or more robust settlement policies that can head off opportunistic lawsuits before they escalate into protracted legal wars.

The Bottom Line:

Litigation funding is here to stay, and it’s going to keep evolving.

It encourages speculative lawsuits, prolongs legal battles, and ultimately siphons resources away from core business functions.

As a CFO or risk manager, you need to understand how this trend impacts your risk exposure and insurance coverage.

A little preparation and the right partnerships now can save you from bigger headaches—and legal bills—down the road.