Lawsuit Litigation Funding Reform Can Bring Justice Without Strings

Black History Month honors the achievements and sacrifices of African Americans throughout our nation’s history, but celebrating the past should not prevent us from closely scrutinizing the present to determine how much farther we must travel on the path to equality and civil justice.

When it comes to economic parity, we still have a long way to go.

The numbers tell a stark story: non-Hispanic Black household income in 2023 was $53,789, compared to $83,121 for non-Hispanic white households. On average, Black drivers pay 46 percent more than white drivers for auto insurance. Black Americans are more than twice as likely than white Americans to be unbanked or underbanked, which means they either lack access to a bank account or have only limited access to traditional banking services.

Black New Yorkers must contend with these challenges on top of the higher-than-average rent, fuel, and grocery costs that come with living in the Empire State. Last month, Governor Kathy Hochul rightly called the state’s cost of living “just too damn high” and announced new policies designed to put money back into families’ pockets - including an increase in the hourly minimum wage and the nation’s first paid prenatal leave program.

These are steps in the right direction. But the governor and state lawmakers can do more to protect the financial health of New Yorkers – including individuals of color. A good place to start would be by putting some guardrails around the unregulated third-party litigation funding (TPLF) industry. This unchecked practice is one of the underlying factors driving up insurance costs, while unscrupulous industry actors prey on injured, wronged, and grieving plaintiffs.

TPLF, also known as lawsuit lending or car accident loans, is a financial agreement in which a plaintiff receives funding to pursue a lawsuit from a third-party who in return gets a cut of an eventual judgment or settlement. It’s an avenue for the plaintiff to receive up-front financial support to cover medical bills or day-to-day expenses while waiting for their lawsuit to make its often painfully slow way through the court system.

In 2022 alone, the nation’s top 50 insurance carriers spent on average $500 million on litigation expenses, which, in turn, drives up premiums for policyholders. Between 2018 and 2023, the combined Property & Casualty industry saw a 19 percent rise in litigation management costs, which represents a $4-to-$5 billion increase.

Providing a financial lifeline to individuals who are fighting for justice while potentially recovering from an injury and unable to work is both admirable and critical. Yet with little to no state regulation or oversight, the industry has become untethered from that concept as it operates increasingly in the shadows, focusing more on profits than on justice and placing individuals of color, who are far more likely to be unbanked and underbanked, in a position to be exploited.

Due to the absence of regulations, plaintiffs who take out a lawsuit loan can be charged  - and often are - exorbitant interest rates that can exceed 100 percent. Though a borrower does not have to pay back their loan unless their legal case is successful, the truth is that lenders rarely take a chance on plaintiffs who aren’t likely to win – and when they do, they can be on the hook for big money, sometimes even ending up in debt.

Capping the interest a lawsuit lender can charge is important, but on its own does not constitute true reform. It must be coupled mandated disclosure of lawsuit loans during the litigation process to reveal who – if anyone - might be exerting undue influence in a case. Without this transparency, as a 2024 white paper by the law firm Kahana Feld found, conflicts of interest abound due to the “incestuous relationship” between third-party litigation finance companies and plaintiff counsel.

The lack of transparency is causing significant harm. For example, in 2019, a young Bronx mother of newborn twins took out a lawsuit loan after suing over alleged insufficient care by her obstetrician that resulted in life-threatening neurological injuries to her second-born child. It turned out the mother’s attorney had directed her to a funding company owned and operated by his own brother, who, in turn, saddled her with an aggressive interest rate that caused her financial distress.

Reform opponents have claimed that requiring disclosure of lawsuit loans could cause lenders to cease operations, cutting off an important revenue stream for struggling plaintiffs. But that has not been the case in jurisdictions where this is already the norm.  

Some of the most egregious examples of the lawsuit lending industry preying on vulnerable individuals - from NFL players suffering from concussions and 9/11 first responders to falsely accused former prisoners – have made headlines. But most victims of unscrupulous lenders are suffering in silence, lacking the resources or courage to speak up.

The governor and legislative leaders can right this wrong by enacting commonsense lawsuit lending reforms while preserving a financial lifeline for those who need it. The voiceless and defenseless are looking to Albany for leadership and action now.

Dr. Julianne Malveaux is an economist and author based in Washington, DC. juliannemalveaux.com.