All posts by Jeff Dunsavage

Auto Insurance, Legal Environment, Regulation

Delaware Legislature Adjourns Without Action on Banning Genderas Auto Insurance Factor

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Delaware’s state Legislature adjourned for the year without the House taking action on Senate Bill (SB) 231, which called for prohibiting the use of gender as a rating factor in personal automobile insurance policies.

The measure was based on research conducted with the Consumer Federation of America that contended many insured Delaware women are charged more than men, even when all other factors are the same. If signed into law, it would have required Delaware’s auto insurers to revisit how they price their personal automobile insurance policies for all drivers. Six states – California, Hawaii, Massachusetts, Michigan, North Carolina, and Pennsylvania – already have similar laws in place.

“The Delaware state Legislature and the Department of Insurance have the right and responsibility to govern and regulate how insurance companies conduct business within the State of Delaware,” Triple-I Chief Insurance Officer Dale Porfilio wrote in response to SB 231, which was approved by the Delaware Senate in April 2022. However, in his letter to Delaware Insurance Commissioner Trinidad Navarro, he raised several concerns with the underlying research, including:

Website Quotes vs. Issued Policies. While the Internet and electronic processing of quotes have dramatically improved the speed and accuracy of quotes, Porfilio wrote, “Many details can change for the portion of quotes which ultimately become issued policies, causing quotes to not be 100 percent accurate for issued premiums.”

Single Hypothetical Insured vs. Range of Actual Insureds. The report studied hypothetical 35-year-old drivers, then drew a conclusion about the full breadth of female and male drivers in the state of Delaware.

Aggregation across Zip Codes. Pricing methodologies are refined to very specific territorial definitions, which vary by insurer, and the report does not describe how the sample was aggregated across Zip Codes.

Porfilio explained that a consequence of enacting S.B. 231 would be a redistribution of who pays how much premium, with most of the premium increases paid by female policyholders (notably at younger ages), and a majority of the premium decreases received by male policyholders.

Critics of U.S. auto insurer pricing practices have expressed concerns that certain rating factors discriminate against certain groups. Triple-I has explained in multiple contexts how U.S. auto insurers use a wide variety of rating factors to accurately price policies.  These factors must conform to the laws and regulations of the state in which the auto insurance policies are sold,  and eliminating any one could force less-risky policyholders to overpay and allow those with greater risk to pay less than they should.

Learn more about auto insurance pricing

Triple-I: Rating-Factor Variety Drives Accuracy of Auto Insurance Pricing

Why Personal Auto Insurance Rates Are Likely to Keep Rising

IRC Releases State-by-State Auto Insurance Affordability Rankings

Cyber Risk, Disaster Resilience, Emerging Risks, Insurers and the Economy, Terrorism Risk

Complex Risks in a Complicated World:Are Federal Government “Backstops” The Answer?

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Two U.S. agencies have agreed to explore the potential need for a federal mechanism – analogous to the one put into place for terrorism insurance after the 9/11 attacks – to address the growing cybersecurity threat to critical infrastructure. The perceived need to do so speaks to the growing complexity and interrelatedness of this and other risks facing governments, businesses, and communities today.

The Government Accountability Office (GAO), in a recently published report, recommended that Treasury’s Federal Insurance Office (FIO) and Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) take this action.  It acknowledges that FIO and CISA have “taken steps to understand the financial implications of growing cybersecurity risks” – but those actions have not included the possible need for a federal insurance mechanism.

“Cyber insurance and the Terrorism Risk Insurance Program (TRIP)—the government backstop for losses from terrorism—are both limited in their ability to cover potentially catastrophic losses from systemic cyberattacks,” the GAO report says. “Cyber insurance can offset costs from some of the most common cyber risks, such as data breaches and ransomware. However, private insurers have been taking steps to limit their potential losses from systemic cyber events.”

Insurers are excluding coverage for losses from cyber warfare and infrastructure outages, the report notes, and cyberattacks may not meet TRIP’s criteria to be certified as terrorism.

As we’ve previously reported, some in the national security world have compared U.S. cybersecurity preparedness today to its readiness for terrorist acts prior to the 9/11. Before Sept. 11, 2001, terrorism coverage was included in most commercial property policies as a “silent” peril – not specifically excluded and, therefore, covered. Afterward, insurers began excluding terrorist acts from policies, and the U.S. government established the Terrorism Risk Insurance Act (TRIA) to stabilize the market.  TRIA created TRIP as a temporary system of shared public and private compensation for certain insured losses resulting from a certified act of terrorism.

Treasury administers the program, which has to be periodically reauthorized. TRIP has been renewed four times – in 2005, 2007, 2015, and 2019 – and the backstop has never yet been triggered.

The GAO recommendation that a similar solution be considered for cyber risk highlights the potential insufficiency of traditional risk-transfer products to address increasingly complex and costly threats. Alongside terrorism and cyber, we’ve experienced – and continue to experience – the myriad perils of pandemic, with its assorted impacts on the global supply chain, driving behavior, business interruption and remote work practices, and the economy. Even if those challenges moderate, we will continue to face what is perhaps the most entangled set of risks on the planet: those associated with climate and extreme weather.

One only has to look as far as Florida, where the insurance market is on the brink of failure as writers of homeowners coverage begin to go into receivership and global reinsurers reassess their appetite for providing capacity in that hurricane-prone, fraud- and litigation-plagued state. Or, one could follow the wildfire activity in recent years; or flood loss trends, increasingly creating problems inland, where flood insurance purchase rates tend to be lower than in coastal areas; or insured losses due to severe convective storms, which have been rising in parallel with losses from hurricanes.

Fortunately, many states are taking steps – often with partners, including the insurance industry – to anticipate and mitigate such risks. Much is being done, but much work remains to change behaviors, best practices, and public policies in ways that will reduce risks and improve availability and affordability of coverage.

Auto Insurance, Legal Environment

IRC Study: Public Perceives Impact of Litigationon Auto Insurance Claims

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Most Americans believe attorney advertising increases the number of liability insurance claims and lawsuits, according to recent research from the Insurance Research Council (IRC). The survey also indicated that consumers see a connection between attorney advertising and insurance costs.

The IRC – like Triple-I, an affiliate of The Institutes – also found that consumer awareness of third-party litigation funding has increased, though many Americans remain uncertain what to think of the practice. Litigation funding – in which third-party investors assume all or part of the cost of a lawsuit in exchange for a percentage of the settlement – is often cited as contributing to “social inflation.” Social inflation refers to the impact of rising litigation costs on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage.

“The public sees a connection between attorney ads and the cost of insurance,” said IRC President and Triple-I CEO Dale Porfilio, FCAS, MAAA. “Two-thirds of respondents who had an opinion said advertising by attorneys increases the number of liability claims and lawsuits. Fifty-nine percent said such advertising increases the cost of insurance.”

The survey also found 81 percent of Americans had seen an attorney advertisement within the past year. Thirty-nine percent had never heard of the term “litigation funding.”

The IRC study, Public Attitudes on Litigation Trends and the Role of Attorneys in Auto Insurance Claims, consisted of an online survey with over 1,500 respondents. It also uncovered that:

  • Consumers generally expect insurers to settle auto insurance claims fairly and quickly, but one in four say they would hire an attorney before even contacting an insurer;
  • The views of many consumers about the benefits of hiring attorneys to help with insurance claims conflict with evidence from claims-based research;
  • Most Americans believe there are too many personal injury lawsuits today;
  • Significant generational differences exist on these topics, with younger respondents being far more likely than older respondents to favorably view attorney involvement and litigation; and
  • The public’s level of understanding suggests some educational opportunities for those seeking to address costs in the insurance system.

“This survey builds on many years of IRC work examining the role of attorneys in insurance claims and the resulting consequences,” Porfilio said. “Our longstanding series of closed auto injury claim studies has shown an ever-increasing rate of attorney involvement, even among no-fault claims.”

Porfilio noted that these studies consistently show that claimants who hired attorneys waited significantly longer to receive their settlements and – after medical expenses and legal fees – those settlements were smaller than for claimants who did not.

“Given the costs added to the system and the lack of evidence of clear benefit for the claimant, it is important to understand public attitudes about attorney involvement,” Porfilio said.

Homeowners Insurance, Insurers and the Economy, Legal Environment

Fraud, Litigation Push Florida Insurance Market to Brink of Collapse

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With its abundance of unneeded new roofs on homes – and flashy lawyer billboards at every turn claiming massive settlements on claims – Florida’s insurance market is on the verge of failure. This man-made catastrophe is causing financial strain on consumers, as the annual cost of an average Florida homeowners insurance policy will skyrocket to $4,231 in 2022, nearly three times the U.S. annual average of $1,544.

“Floridians pay the highest homeowners insurance premiums in the nation for reasons having little to do with their exposure to hurricanes,” said Triple-I CEO Sean Kevelighan.  “Floridians are seeing homeowners insurance become costlier and scarcer because for years the state has been the home of too much litigation and too many fraudulent roof-replacement schemes. These two factors contributed enormously to the net underwriting losses Florida’s homeowners’ insurers cumulatively incurred between 2016 and 2021.” 

Two major hurricanes made landfall in the state since 2016: 2017’s Irma and 2018’s Michael.

No direct hits occurred in Florida over the past three hurricane seasons. 

Florida, however, is the site of 79 percent of all homeowners insurance lawsuits over claims filed nationwide, even though Florida’s insurers receive only 9 percent of all U.S. homeowners insurance claims, according to the Florida governor’s office. To illustrate how lawsuits have weighed on insurer operating costs, JD Supra, citing the Florida Office of Insurance Regulation (OIR), reported $51 billion was paid out by Florida insurers over a 10-year period, and 71 percent of the $51 billion went to attorneys’ fees and public adjusters. The 2020 and 2021 cumulative net underwriting losses for Florida homeowners’ insurers totaled more than $1 billion each year.

“The state’s homeowners’ insurers have been forced to respond to these unfortunate market trends this year by restricting new business, non-renewing existing policies, and even canceling policies mid-term,” Kevelighan said. “What’s more, four homeowners insurance companies have been declared insolvent since February — all while more Americans are moving to Florida than any other state.”

Citizens Property Insurance Corp., the state-backed property insurer of last resort in Florida, has seen its policy count rise to nearly 900,000 this month statewide.  Its policy count figure stood at about 420,000 in October 2019.  Citizens provides insurance coverage to homeowners unable to find a private-sector insurer willing to sell them a homeowners insurance policy.

Placing further pressure on the affordability and availability of homeowners’ insurance in the state, third-party rating bureaus have downgraded the financial ratings of some insurers operating in Florida.

The typical Florida homeowners’ insurance policyholder paid $2,505 for coverage in 2020, Triple-I found, and that figure rose to $3,181 in 2021.  Triple-I’s analysis was based on data and analyses from Florida’s OIR, the National Association of Insurance Commissioners (NAIC), and Triple-I’s estimates of what insurers are paying today for home replacement costs.

During a special legislative session in May 2022, Florida lawmakers passed Senate Bill 2B, which Gov. Ron DeSantis signed into law. The measure is aimed at easing homeowners’ premium increases and reducing excessive litigation.

To help Floridians and others residing in natural disaster-prone states better manage risk and become more resilient, Triple-I launched a few years ago its Resilience Accelerator initiative, Kevelighan said.

The Resilience Accelerator’s goal is to demonstrate the power of insurance as a force for resilience by telling the story of how insurance coverage helps governments, businesses and individuals recover faster and more completely after natural disasters. “The insurance industry’s focus on resilience is starting to pay dividends as more Americans recognize the very real risks their residences face from floods, hurricanes, and other natural disasters,” Kevelighan added.

Disaster Preparedness, Disaster Resilience, Homeowners Insurance

Lightning Sparks
More Than $1 Billion
in Homeowners Claims
Over Five Years

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By Loretta Worters, Vice President, Media Relations, Triple-I 

More than $1 billion in lightning-caused U.S. homeowners insurance claims were paid out in 2021 to 60,000-plus policyholders, with 40 percent of that figure ($522 million) attributable to California alone, according to Triple-I.  

Based on national insurance claims data, the Triple-I found:

  • The total value of claims in 2021 were down more than 36 percent from 2020 but increased more than 43 percent since 2017, from $916.6 million to more than $1.3 billion;
  • The average number of lightning-caused U.S. homeowners insurance claims  fell more than 15 percent between 2020 and 2021, continuing a downward trend since 2017 of more than 28 percent; and 
  • The average cost per claim was also down 25 percent from 2020 (28,885 to 21,578),  but the five-year trend shows the average cost per claim has doubled, to $21,578 from $10,781.

The average cost per claim is volatile from year to year, but it has been particularly high in the past two years because of lightning fires throughout the country, the Triple-I noted. 

The outsized 2020 insured loss payout number nationwide was caused in part by California’s CZU August Complex fire, which was sparked by lighting.  The multiple blazes impacted Santa Cruz and San Mateo counties and caused at least one fatality. Alaska is currently fighting a wildfire in the southwest part of the state due to lighting. 

Not only does lightning result in deadly fires it can cause severe damage to appliances, electronics, computers and equipment, phone systems, electrical fixtures, and the electrical foundation of a home.  The resulting damage may be far more significant than a homeowner realizes.  Supply-chain delays are also sending appliances and electronics prices higher.

Florida—the state with the most thunderstorms—remained the top state for number of lightning claims in 2021, with 5,339, followed by Texas, Georgia, and California, respectively. California, which had 3,381 lightning claims, had the highest average cost per claim at $154,574, the second year to have an impact on the Golden State. 

Catastrophes, Disaster Resilience, ESG, Insurers and the Economy, Regulation

Triple-I Responds to SEC’s Proposed Climate-Risk Disclosure Requirements

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Creating a new layer of federal oversight would neither enhance nor standardize the climate-related disclosures U.S. insurers make to investors, Triple-I said in a letter to the U.S. Securities and Exchange Commission (SEC).

Triple-I’s letter responded to the SEC’s request for public comment on its proposed rulemaking, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”

“The U.S. property and casualty industry supports and can play a constructive role in advancing transparency around weather- and climate-related risks,” Triple-I CEO Sean Kevelighan and Chief Insurance Officer Dale Porfilio wrote. “Indeed, as financial first responders, insurers have a strong ethical and financial interest in facilitating the transition to a lower-carbon economy and in promoting resilience during that transition.”

But adding a new layer of federal oversight to the existing regulatory structure would complicate insurer operations “while providing little to no benefit toward reducing greenhouse gas emissions and adapting to near-term conditions and perils,” the letter said.

The U.S. insurance industry is regulated in more than 50 jurisdictions, receiving more governance and regulatory oversight than any other type of financial service. More than 80 percent of insurers’ investments are in fixed-income – mostly municipal – securities.

“The SEC’s effort overlaps significantly with those of other entities,” Kevelighan and Porfilio wrote, mentioning the National Association of Insurance Commissioners (NAIC) and the states that regulate insurance, as well as the Treasury Department’s Federal Insurance Office (FIO). “Assessing Scope 3 emissions would be particularly onerous for insurers due to the fact that they cover diverse personal and commercial assets and activities, over which they have no control – further, there is currently no accepted methodology for insurers to measure their underwriting-related Scope 3 emissions, which makes the SEC’s proposed requirement premature for our industry.”

Scope 3 emissions are the result of activities from assets neither owned nor controlled by the reporting organization, according to the U.S. Environmental Protection Agency (EPA).

Triple-I recommended that the NAIC climate risk disclosure survey serve as the primary reporting regime for all insurers, allowing for consistent enforcement across ownership structures (public, private, and mutual) while avoiding unnecessary complexity and expenses.

“Property and casualty insurers are no strangers to climate and extreme-weather risk. We may not always have talked about the issue in those terms, but our industry has long had a financial stake in the issue. Consider the fact that insured losses caused by natural disasters have grown by nearly 700 percent since the 1980s and that four of the five costliest natural disasters in U.S. history occurred over the past decade.The industry is committed to disclosure of climate-related exposures, as such information will be integral to insurers’ ability to accurately and reliably underwrite such risks and make better-informed investment decisions,” Kevelighan and Porfilio wrote.

Learn More:

Report: Policyholders See Climate as a ‘Primary Concern’

Climate Risk Is Not a New Priority for Insurers

A Push for Better Building Codes as Catastrophe Losses Mount

Widening and Deepening the Conversation on Climate Risk and Resilience

Auto Insurance, Highway Safety

Distracted Driving Surges Since Start of Pandemic

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By Max Dorfman, Research Writer, Triple-I

Distracted driving in the United States has risen more than 30 percent from February 2020 to February 2022, as the coronavirus pandemic has upended driving patterns, according to a recent report by telematics service provider Cambridge Mobile Telematics (CMT). This comes despite improvements in other dangerous behaviors, like speeding, which has declined as traffic returned since the early phases of the pandemic.

Drivers in January 2022 averaged 1:35 seconds of distraction per hour, a high for the past three years. Additionally, in February 2022, this figure increased to 1:38 seconds – a 25.5 percent increase from February 2019, and a 30.3 percent rise from February 2020, which was the last month of pre-pandemic driving.

Additionally, evening and late-night distracted driving has dramatically increased compared to pre-pandemic levels, with evening distraction ballooning to almost 35 percent from February 2020 to April 2020. Late-night distraction has become even worse, with 40 percent of drivers in the same period. This trend has remained high, with the average time distracted standing at 1:29 seconds per hour by February 2022 for late-night driving.

The U.S. government takes notice

Recently, the Governors Highway Safety Association (GHSA) released a report detailing data limits and other barriers to limiting distracted driving. The report found that approximately 3,142 people died in distraction-related accidents in 2020, with an estimated 400,000 people injured each year in such crashes. The true numbers, according to the study, are likely higher due to underreporting.

The GHSA report also notes that the most prevalent and highest-risk behaviors include:

  • Cell dial;
  • Cell text;
  • Reaching for an object;
  • Cell-browse and;
  • In-vehicle device.

A total of 15 percent of police-reported motor vehicle traffic crashes recorded distraction as a factor, according to national crash data, with drivers aged 15 to 20 years at the highest risk for distracted driving in a fatal crash.

This comes despite 80 percent of drivers stating that talking on a hand-held cell phone is extremely or very dangerous. However, 37 percent admit to doing this. Almost all drivers (95 percent) said reading or typing a text or email on a hand-held cell phone while driving is extremely or very dangerous. However, 23 percent reported typing or sending a text or email on a hand-held cell phone at least once in the past 30 days, with 34 percent stating that they read on a hand-held device while driving.

Can telematics help?

A 2020 study by Triple-I’s sister organization the Insurance Research Council (IRC) focused on public perception and use of telematics, which can be used to lower the cost of insurance for responsible drivers.

Indeed, 45 percent of drivers surveyed said they made significant safety-related changes in the way they drove after participating in a telematics program. An additional 35 percent said they made small changes in the way they drive.

And although many individuals who made small or significant changes ultimately return to previous driving habits, one in four participants reported that they consider the changes made to be permanent, with an additional 19 percent saying they engaged in previous driving habits only rarely.

These kinds of shifts in behavior hold promise not only for the future of telematics, but for safer roadways with significantly fewer accidents.

Homeowners Insurance, Industry Financials, Market Conditions

Fla. P&C Crisis Worsens As Hurricane Season Begins

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Already this year, three Florida insurers have been declared insolvent due to their failure to obtain full reinsurance as the 2022 hurricane season bears down.

“We have the potential of a massive failure of Florida insurers, probably the worst on record,” says Triple-I communications director Mark Friedlander. According to Friedlander, the $2 billion reinsurance fund created in legislation Gov. Ron DeSantis signed into law at the end of May isn’t nearly enough, and private reinsurers are pulling back from the market because of its high level of property claims and litigation.

“It needed to be at least double the amount of the funds that were allocated for reinsurance coverage for hurricane season and open to other perils as well,” Friedlander said.

Most recently, insurance rating agency Demotech announced that it had withdrawn its financial stability rating for Southern Fidelity Insurance Company after the insurer placed a moratorium on writing new business and processing renewals in Florida until it secured enough reinsurance for hurricane season. When the Tallahassee, Fla.-based insurer failed to do so by the June 1 start of the season, the OIR ordered it to “wind down operations,” indicating the company could become the fourth Florida residential insurer to fail this year, following the liquidations of St. Johns, Avatar, and Lighthouse.

Auto Insurance, Business Insurance, Catastrophes, Disaster Preparedness, Disaster Resilience, ESG, Health & Safety, Homeowners Insurance, Insurers and the Economy, Market Conditions, Risk Management

Report: Policyholders See Climate as a ‘Primary Concern’

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By Max Dorfman, Research Writer, Triple-I (06/08/2022)

Nearly three-quarters of property and casualty policyholders consider climate change a “primary concern,” and more than 80 percent of individual and small-commercial clients say they’ve taken at least one key sustainability action in the past year, according to a report by Capgemini, a technology services and consulting company, and EFMA, a global nonprofit established by banks and insurers.

Still, the report found not enough action is being taken to combat these issues, with a mere 8 percent of insurers surveyed considered “resilience champions,” which the report defined as possessing “strong governance, advanced data analysis capabilities, a strong focus on risk prevention, and promote resilience through their underwriting and investment strategies.”

The report emphasizes the economic losses associated with climate, which it says have grown by 250 percent in the last 30 years. With this in mind, 73 percent of policyholders said they consider climate change one of their primary concerns, compared with 40 percent of insurers.

The report recommended three policies that could assist in creating climate resiliency among insurers:

  • Making climate resilience part of corporate sustainability, with C-suite executives assigned clear roles for accountability;
  • Closing the gap between long-term and short-term goals across a company’s value chain; and
  • Redesigning technology strategies with product innovation, customer experience, and corporate citizenship, utilizing advancements like machine learning and quantum computing

“The impact of climate change is forcing insurers to step up and play a greater role in mitigating risks,” said Seth Rachlin, global insurance industry leader for Capgemini. “Insurers who prioritize focus on sustainability will be making smart long-term business decisions that will positively impact their future relevance and growth. The key is to match innovative risk transfers with risk prevention and assign accountability within an executive team to ensure goals are top of mind.”

A global problem

Recent floods in South Africa, scorching heat in India and Pakistan, and increasingly dangerous hurricanes in the United States all exemplify the dangers of changing climate patterns. As Efma CEO John Berry said, “While most insurers acknowledge climate change’s impact, there is more to be done in terms of demonstrative actions to develop climate resiliency strategies. As customers continue to pay closer attention to the impact of climate change on their lives, insurers need to highlight their own commitment by evolving their offerings to both recognize the fundamental role sustainability plays in our industry and to stay competitive in an ever-changing market.”

Data is key

The report says embedding climate strategies into their operating and business models is essential for “future-focused insurers,” but it adds that that requires “fundamental changes, such as revising data strategy, focusing on risk prevention, and moving beyond exclusions in underwriting and investments.”

The report finds that only 35 percent of insurers have adopted advanced data analysis tools, such as machine-learning-based pricing and risk models, which it called “critical to unlocking new data potential and enabling more accurate risk assessments.”

Insurers and the Economy, Legal Environment

Litigation-Funding Law Found Lacking in Transparency Department

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Piecemeal efforts to bring transparency to third-party litigation funding continued apace (albeit a snail’s pace) with legislation the governor of Illinois signed into law on May 27th.

The funding of lawsuits by investors with no stake beyond the potential to profit from any settlement has been a growing contributor to the phenomenon known as “social inflation”: Increased insurance payouts and higher loss ratios than can be explained by economic inflation alone. These increased costs necessarily end up being shared by all policyholders through increased premiums.

Litigation funding not only drives up costs – it introduces motives beyond achieving just results to the judicial process. This is why the practice was once widely prohibited in the United States. As these bans have been eroded in recent decades, litigation funding has grown, spread, and morphed into forms that can cost plaintiffs more in interest than they might otherwise gain in a settlement. In fact, it can encourage lengthier litigation to the detriment of all involved – except for the funders and the plaintiff attorneys.

Funding of lawsuits by international hedge funds and other third parties has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg.

But it’s hard to actually know how big the industry is and how much harm it may be causing because, in most cases, plaintiffs’ attorneys are not required to disclose whether, to what extent, and under what terms third-party funders are involved in the cases they bring to court.

Inching toward transparency

In April, we reported on the partial, creeping progress toward bringing greater transparency to this practice in courtrooms and state legislatures. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019.

At the federal level, the Litigation Funding Transparency Act was introduced and referred to the House Judiciary Committee in March 2021. The measure was referred to the Subcommittee on Courts, Intellectual Property, and the Internet in October of last year.

The Illinois legislation, originally introduced in 2021, has some similarities to Wisconsin’s law – but the version signed last week contained “insufficient regulatory safeguards,” the American Property Casualty Insurance Association (APCIA) said. In its letter urging Gov. J.B. Pritzker to veto the measure, APCIA said a major concern is that it authorizes an interest rate to be paid by the plaintiff/borrowers in such cases “that shall be calculated as not more than 18 percent of the funded amount, assessed every six months for up to 42 months.”

The legislation does not clarify whether the 18 percent rate calculation is simple, compound, or cumulative interest over the 42-month period.

“This lack of clarity is problematic, as a cumulatively calculated interest rate could run as high as 126 percent!” APCIA said. “It is essential for the protection of consumers that this interest rate calculation be clarified.”

Further, APCIA explains, “The parties to these funding agreements are not required to disclose their existence, so that the courts and defendants are typically not aware of the presence or identity of the funders as real parties in interest to the litigation. The economic interests of the funders in these transactions are substantially enhanced by prolonged litigation and discouraging the amicable settlement of disputes, all to no ones’ best interests except those of the money lenders.”

Even the legal profession is concerned about the ethical implications of litigation funding. In 2020, the policymaking arm of the American Bar Association (ABA) approved a set of best practices for these arrangements. The resolution lists the issues lawyers should consider before entering into agreements with outside funders – but it doesn’t take a position on the use of such funding.

A standardized approach to disclosure would go a long way toward helping policymakers and decision makers determine an appropriate path forward.