Key Points
- Insurance coalition urges Congress to close tax loophole
- Focus on third-party litigation funding (TPLF) tax treatment
- Billions in tax-free profits for foreign investors alleged
- Tillis introduces bill to tax litigation funding profits
- Business, insurance, and consumer groups back reform
- Critics say loophole fuels “nuclear verdicts” and higher premiums
- Calls for greater transparency and disclosure in TPLF
- Debate over impact on plaintiffs’ access to justice
- Lawmakers eye reconciliation bill for reform opportunity
- Industry warns of rising costs for U.S. households
A powerful coalition of insurance, business, and consumer advocacy groups is calling on the U.S. Congress to close what they describe as a costly and unfair tax loophole in the booming third-party litigation funding (TPLF) industry. The coalition argues that the current tax treatment allows foreign investors to reap billions in untaxed profits by backing U.S. lawsuits, driving up costs for businesses and consumers and undermining the integrity of the American civil justice system. As lawmakers debate new federal tort reforms, the issue is gaining momentum in Washington, with bipartisan calls for transparency, accountability, and a level playing field.
The Tax 'Loophole' at the Heart of the Dispute
Billions in Untaxed Profits
At the core of the coalition’s campaign is the claim that third-party litigation funders—particularly foreign investors—are exploiting a gap in U.S. tax law that lets them avoid paying taxes on profits earned from financing lawsuits. By structuring TPLF contracts as investment vehicles, these entities often benefit from favorable capital gains tax rates or, in some cases, escape U.S. tax obligations altogether. The result, critics say, is a system where outsiders profit from American legal disputes while U.S. businesses and families shoulder the costs.
Double Drawbacks and Tax Fairness
The American Consumer Institute (ACI), a leading member of the coalition, has circulated a letter to Congress highlighting the “double drawback” phenomenon—where companies receive tax refunds on taxes never paid, thanks to excise law loopholes. The coalition argues that closing this loophole would not only create tax fairness but also generate significant federal revenue and reduce incentives for frivolous litigation.
The Growth of Litigation Funding
Explosive Expansion
Litigation finance has seen explosive growth in the U.S., with more than 40 funders managing over $13.5 billion in assets as of 2022, and capital commitments rising by 16% year-over-year. By 2023, the figure had jumped to $15.2 billion, with annual returns for investors averaging around 25%—fueled by so-called “nuclear verdicts” and jackpot settlements. The industry’s rapid expansion has drawn the attention of lawmakers, regulators, and the business community, who warn that unchecked growth could distort the civil justice system.
Foreign Investment and Legal System Concerns
A major concern is the influx of foreign capital into U.S. litigation. According to Senator Thom Tillis (R-NC), who has introduced legislation targeting predatory litigation funding, some of the largest TPLF firms have seen assets surge by hundreds of percent, in part due to investments from unknown foreign sovereign wealth funds. Critics argue that this dynamic turns the U.S. court system into a casino for global investors, incentivizing more litigation and higher settlements.
Legislative Push: The Tackling Predatory Litigation Funding Act
Key Provisions
Senator Tillis’s Tackling Predatory Litigation Funding Act seeks to impose a new tax on profits earned by third-party entities that finance civil litigation, specifically targeting the tax advantages currently enjoyed by TPLF firms. The bill aims to:
- Ensure litigation funders pay taxes on their share of court awards
- Prevent foreign investors from escaping U.S. tax obligations
- Increase transparency and disclosure of TPLF arrangements in lawsuits
Bipartisan and Broad-Based Support
The push for reform has attracted support from a wide array of organizations, including the American Consumer Institute, National Taxpayers Union, Heartland Institute, and the U.S. Chamber of Commerce Institute for Legal Reform. Over 100 major companies—including Amazon, Google, Pfizer, and Exxon—have signed letters urging Congress and the judiciary to require disclosure of litigation funding in civil cases, reflecting broad concern across the business and insurance sectors.
Industry and Political Statements
Insurance Industry Perspective
The American Property Casualty Insurance Association (APCIA) has been vocal in its support for closing the loophole and increasing transparency. Nat Wienecke, APCIA’s senior vice president of federal government relations, wrote to Congress:
“Third-party litigation funding is a dark money lending practice that allows unknown investors with no ties to the injured person to invest in lawsuits, and in some cases falsely inflate medical costs, for their own profit.”
APCIA and others argue that the lack of disclosure and regulation around TPLF drives up insurance premiums, with the average U.S. household paying a so-called “tort tax” of more than $3,600 annually due to unnecessary and abusive litigation.
Lawmakers’ Views
Senator Tillis and Representative Kevin Hern (R-OK) have both emphasized the need to “end a tax break for lawsuits” and curb what they describe as predatory practices in the litigation funding industry.
“Why are foreign investment funds that finance predatory lawsuits against U.S. companies allowed to dodge taxes on their legal payouts? Good question, and now North Carolina Sen. Thom Tillis and Oklahoma Rep. Kevin Hern are seeking to close this anti-growth loophole.”
Consumer and Business Advocacy
Matt Webb, senior vice president of legal reform policy at the U.S. Chamber of Commerce Institute for Legal Reform, commented on the unprecedented unity among business and insurance groups:
“It’s a clear indication that this community strongly wants more broad-based third-party litigation funding disclosure. … It’s not just an insurance issue, it’s … the entire business community that is expressing concerns about it.”
The Case for Reform: Supporters’ Arguments
Impact on Costs and the Legal System
Supporters of reform argue that the current system incentivizes more litigation, higher settlements, and “nuclear verdicts”—jury awards exceeding $10 million—which in turn drive up insurance rates and costs for businesses and consumers. They contend that foreign investors, shielded from U.S. taxes, have little stake in the merits of cases and are motivated solely by profit, sometimes at the expense of actual plaintiffs.
Calls for Transparency and Disclosure
A central demand of the coalition is for mandatory disclosure of TPLF arrangements in civil litigation, similar to the requirement that insurance coverage be disclosed in most jurisdictions. Proponents argue that greater transparency would deter frivolous lawsuits and ensure that all parties—including judges and juries—are aware of the financial interests at play.
Counterarguments: Access to Justice and Plaintiff Support
TPLF as a Lifeline for Plaintiffs
Not all voices in the debate are critical of litigation funding. Some consumer advocates and legal funding executives argue that TPLF provides essential financial support to plaintiffs who might otherwise be unable to pursue legitimate claims. Eric Schuller, president of the Alliance for Responsible Consumer Legal Funding, stated that litigation financers act as “screening devices” on the merits of claims, since they only invest in cases with a reasonable chance of success.
Concerns Over Chilling Effect
Critics of the proposed reforms warn that imposing new taxes and disclosure requirements could chill access to justice, particularly for individuals facing well-resourced corporate defendants. They argue that litigation funding helps level the playing field and that reforms should not inadvertently harm legitimate claimants.
Recent Regulatory and Legislative Developments
State-Level Action
Some states have already moved to regulate TPLF, with Georgia recently passing a bill to oversee third-party litigation financing practices. However, the coalition argues that only federal action can address the tax loophole and ensure uniform rules across the country.
Federal Momentum
The coalition is urging Congress to use the current reconciliation bill as a vehicle for reform, framing it as an opportunity for a significant federal tort reform victory. Lawmakers from both parties are signaling openness to changes, with recent IRS and Treasury actions targeting related tax avoidance schemes expected to raise billions in new revenue.
What’s Next: The Path Forward
Congressional Outlook
With bipartisan support, industry backing, and growing public awareness, momentum is building for congressional action. The Tackling Predatory Litigation Funding Act and related proposals are under active consideration, with supporters pushing for swift passage to close the loophole before the end of the legislative session.
Broader Implications
If enacted, the reforms could reshape the litigation funding industry, reduce incentives for frivolous lawsuits, and potentially lower costs for businesses and consumers. However, the debate over access to justice and the role of litigation finance is likely to continue, as stakeholders on all sides grapple with the balance between fairness, transparency, and the right to legal recourse.
The insurance industry coalition’s call for Congress to close the litigation finance tax loophole marks a pivotal moment in the ongoing debate over third-party litigation funding. As lawmakers weigh new taxes, disclosure requirements, and reforms to the U.S. tort system, the outcome will have far-reaching consequences for investors, plaintiffs, businesses, and consumers alike. The coming months will test whether Congress can craft a solution that promotes fairness, transparency, and access to justice in America’s courts.