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A questionable practice: view bills to regulate litigation financing with caution.

Many in the business community have grown wary of anything promoted as enhancing "access to justice," as the phrase is often employed euphemistically in place of terms that may be more apt--such as "increased litigation" and "frivolous lawsuits."

One practice that has been defended from criticisms as enhancing access to justice is litigation financing, also known as non-recourse litigation lending, in which third-party companies advance funds to plaintiffs in hopes of collecting, with interest of course, when the plaintiffs' cases result in verdicts or settlements.


A number of states have seen legislative proposals in recent years to regulate the practice of litigation financing, and while one might think that such bills would be welcomed by those concerned with lawsuit abuse, such is not the case. The bills appear more of an effort to remove questions about the legal propriety of the practice of litigation financing than a bona fide effort to regulate the practice.

Traditionally, third-party financing of litigation has not been looked upon favorably. Under common law dating back centuries to England, it was viewed as contrary to public policy under legal doctrines known as champerty and maintenance. William Blackstone, whose treatise on English common law became an authority for the development of American law, referred to those who became financially involved in litigation that did not concern them as "pests of civil society," who were "officiously interfering in other men's quarrels."

American courts for the most part maintained a position against the propriety of litigation financing when cases were brought by lenders seeking to collect on loans after a settlement or verdict: the courts would refuse to enforce the loan contract because the whole transaction was against public policy. Courts in some states, however, have re-evaluated the old doctrines and come to the conclusion that there is nothing wrong with a third party making an investment to obtain a financial interest in litigation.


There are those that see plenty wrong with the practice, however, including the American Tort Reform Assn. (ATRA) and the U.S. Chamber of Commerce's Institute for Legal Reform. Both organizations have raised concerns that litigation financing leads to more lawsuits, and particularly more frivolous lawsuits, that it raises questions about attorney ethics and loyalty, and that it interferes with the proper balance of relationships among plaintiffs, defendants and the attorneys that represent them. Of particular concern is the impact of litigation financing when it interacts with other techniques meant to enhance "access to justice," such as class actions and mass tort lawsuits.

The concerns raised about litigation financing have to be taken seriously because the practice has evolved over the past decade or so to a full-fledged industry. An Internet search can put one in contact with a number of firms eager to evaluate a claim and potentially lend money to a plaintiff within minutes. The American Litigation Financing Assn. has a website stating the organization was formed in 2004 by nine companies and now has 20 members.


So how does legislation come into play regarding this issue? While the practice of litigation financing has grown, and while courts in some states have essentially approved of the practice by abandoning the doctrines of champerty and maintenance, the practice operates in many states under a cloud of uncertainty regarding its legality. The bills that have been pushed in several states--ATRA has reported recent legislative activity in Delaware, Illinois, Kentucky, Maryland, Minnesota, Nebraska and New York--seem to establish some standards where there are none existing.

However, on close inspection it is apparent that the bills that have been pushed are extremely lenient, and the bills' greater impact would be to remove the cloud of legal uncertainty that exists today. Legislative enactments generally trump common law rules, so a court trying to decide whether to apply the traditional rules of champerty and maintenance would look to a statute that establishes rules regarding the practice of litigation financing as tantamount to a legislative blessing of the practice. Acceptance of litigation financing would be the public policy of the state, in other words.

So the real question, for businesses and the insurance industry that pays for litigation lodged against businesses, is what a proper legislative response to litigation financing should be. Should the doctrines that held it against public policy be adhered to? Should it be subject to strict regulation and oversight? These are serious public policy questions, with significant implications for the country's legal liability system. Representatives of insurers and businesses should therefore be alert to legislation that seeks to resolve the matter without sufficient public policy discourse.

Paul T. Tetrault, JD, CPCU, ARM, AIM, Northeast state affairs manager for the National Assn. of Mutual Insurance Cos., advocates on behalf of NAMIC member companies on key legislative and regulatory issues. Contact Paul at
Litigation financing

States that considered legislation
regarding litigation financing in 2010:

State Bill

Delaware HB 422
Illinois SB 3322
Kentucky SB 148
Maryland HB 1331, SB 831
Minnesota HF 3052, SF 2704
Nebraska LB 1094
New York A 7891, S 5389
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Title Annotation:Legislative Roundup
Author:Tetrault, Paul T.
Publication:American Agent & Broker
Date:Nov 1, 2010
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