North Carolina recently became the first state in the nation to prohibit third-party litigation funding (TPLF) in civil litigation, a move that has generated discussion across the legal, insurance and nonprofit sectors. While the long-term impact remains to be seen, the law highlights a broader conversation taking place nationwide about litigation costs, claim outcomes and the financial pressures facing mission-driven organizations.
For faith-based organizations, nonprofits, schools and camps, understanding these trends matters.
Changes in the legal environment can influence everything from organizational risk to the resources available to serve communities.
What is third-party litigation funding?
Third-party litigation funding occurs when an outside investor or funding company provides financial support for a lawsuit in exchange for a portion of any future settlement or court award.
In simple terms, it adds a financial stakeholder to a case who isn’t part of the underlying dispute but has a direct interest in the outcome. Instead of a lawsuit being a dispute between two parties seeking a fair resolution, third-party litigation funding allows outside investors to buy a financial stake in the lawsuit. Oftentimes, they cover the plaintiff’s legal fees in exchange for a significant portion of the final award payout.
This creates concerns of how outside investors may influence the way cases are pursued or settled, potentially contributing to:
• Longer timelines
• Higher litigation costs
• Larger settlement demands
Others also raise concerns about whether outside financial interests can affect the independence of the legal process or create incentives that don’t always align with the parties originally involved in the case.
Perhaps the most notable risk is that an outside investor brings different interests and risk tolerances to a legal dispute. Individual claimants and individual defendants often favor resolutions that enable the parties to spend less money litigating and focus their efforts on compromise, finding a middle ground that is equitable for all in recognition of the risks and uncertainties. There is evidence the involvement of a stranger in a dispute can lead to outsized settlement demands and a greater willingness to take higher risks during litigation. This preference for risk can make compromise more difficult — and in some cases impossible — even when it exposes the plaintiff to a significant chance of recovering nothing. That distortion has resulted in the gamification of our legal system.
Each of these dynamics are why third-party litigation funding has drawn increased attention from policymakers, insurers and industry trade groups.
Why third-party litigation funding affects mission-driven organizations
Nonprofits and faith-based organizations exist to serve people and strengthen communities. However, when organizations face litigation, the financial impacts can be significant.
Because nonprofits operate on fixed budgets, nearly every dollar is directly tied to community services, programs, education or outreach. Organizations rarely have large cash reserves to afford prolonged legal disputes.
When an outside investor funds a lawsuit, the financial pressure to find a swift, equitable resolution often disappears. For a nonprofit or faith-based group, a drawn-out legal battle means valuable time, focus and limited funds must be diverted away from their core purpose just to sustain defense costs.
Taken together, these trends help explain why developments like North Carolina’s decision are drawing attention.
Every dollar directed toward legal expenses is a dollar that cannot be invested in ministry, education, outreach, community programs or other mission-focused activities. At the same time, it also forces nonprofits to navigate a commercialized legal landscape that stands in contrast to community-focused operations.
How third-party litigation funding affects insurance for community organizations
Protecting a mission is a shared effort, which is why nonprofits work with their insurer to secure liability coverage.
However, as investor-backed litigation drives up the average cost, length and unpredictability of claims across the country, insurance providers must adjust premiums to get pricing gradually in line with the increasing cost of lawsuits.
Developments such as North Carolina’s action underscore the importance of maintaining a fair and predictable legal environment.
“This is a step in the right direction. When outside investors have a financial stake in litigation, it can distort the fundamental fairness of our legal system in ways that don’t serve the people or organizations at the center of a dispute. This is a win for fairness by keeping the interests of a stranger to the dispute from influencing outcomes. Instead, the parties can focus on resolving disputes fairly based on their merits. That’s good for nonprofits, good for insurers and ultimately good for the communities they serve. We hope North Carolina’s action inspires other states to consider similar reforms that bring greater equity by limiting the influence of outside financial interests.”– Ted Ewing, senior vice president, chief claim officer
What could happen next?
It remains to be seen whether other states will pursue similar legislation. However, North Carolina’s action is likely to be closely watched by policymakers, legal professionals, insurers and nonprofit leaders across the country.
The law may serve as an early indicator of a broader conversation around litigation reform, legal costs and the factors contributing to increasingly outsized verdicts.
Regardless of how the legislative landscape evolves, we encourage you to stay informed about developments that could affect risks and public policy at both the state and federal levels.
We’re proud to support important public policy discussions that help create a stronger, more resilient future for churches, schools, camps and nonprofits.
.jpg)
