Lawsuit Abuse Reform for the Transportation Sector: Current Efforts to Rein in LossesIf you look into why transportation insurance rates are rising, you’ll hear a lot about third-party litigation funding. The emergence of third-party litigation funding has coincided with a rise in legal costs, which doesn’t appear to be a coincidence. To rein in losses, there’s been a recent push for lawsuit abuse reform.
What Is Third-Party Litigation Funding?
Third-party litigation funding (TPLF) refers to a financing arrangement in which an unrelated party with no connection to the case funds a lawsuit. The financing arrangement is supposed to benefit plaintiffs (who receive the funds they need to pursue justice through the legal system) and the third-party funders (who may receive a return on their investment if the case succeeds).
While that may sound reasonable in theory, critics have accused the practice of fueling lawsuit abuse, drawing out legal process, and contributing to higher legal costs.
The U.S. Chamber of Commerce Institute for Legal Reform argues that TPLF is problematic for multiple reasons. One issue is that it turns courtrooms into investment opportunities and may incentivize non-meritorious litigation, prioritizing profit over justice. The TPLF industry has experienced tremendous growth in recent years and is currently valued at about $15.2 billion, but it is not regulated and lawyers do not need to disclose TPLF investments to judges, plaintiffs, or defendants.
Social Inflation and Nuclear Verdicts
Many experts point to TPLF as a key driver in social inflation and nuclear verdicts. According to Swiss Re, social inflation has increased liability claims by 57% in the U.S. over the past decade.
The impact on the transportation sector has been especially noticeable. The Insurance Information Institute says social inflation contributed to a $30 billion increase in commercial auto liability claims between 2012 and 2021. Jury verdicts in excess of $10 million – and sometimes far in excess – have become increasingly common.
As an example of a nuclear verdict against the trucking industry, FreightWaves says a Texas jury reached a $90 million verdict (more than $100 million with interest) against a trucking company after a deadly collision between a commercial truck and a pickup truck on icy roads. The driver of the pickup truck lost control and crossed lanes into the path of the commercial truck, but the driver of the commercial truck was found liable for going too fast for the road condition, despite being below the speed limit. The verdict was reversed by the Texas Supreme Court but only after a long and costly legal battle.
There are many other examples of nuclear verdicts against trucking companies, many of which are never overturned. As TPLF does not need to be disclosed, it’s difficult to determine when it is a factor. Nevertheless, TPLF, social inflation, and nuclear verdicts all appear to be related problems, plaguing the transportation sector and driving up insurance costs.
The Push for Legal Reform
If TPLF is the problem, tort reform could be the solution. Lawmakers at both the federal and state level have introduced a variety of proposals to curb legal abuse.
One simple idea is to increase taxes on TPLF. According to the Insurance Journal, critics of TPLF have pointed out that the industry is not taxed enough, with foreign investors sometimes not being taxed at all. One version of the One Big Beautiful Bill included a provision to tax TPLF earnings at approximately 41%, but this rule did not make it into the final version of the bill.
Other proposals have focused on the problems of secrecy and foreign manipulation. According to the Institute for Legal Reform, the Litigation Transparency Act would require disclosure of all TPLF agreements for federal civil cases, while the Protecting Our Courts From Foreign Manipulation Act would prohibit foreign governments and sovereign wealth funds from investing in U.S. litigation.
At the state level, Transport Topics says state lawmakers have been working on reforms to rein in lawsuit abuse. Many states – including Arizona, Florida, Texas, Louisiana, Georgia, and Wisconsin – have introduced or are expected to introduce legislation targeting lawsuit abuse. In Wisconsin, legislators approved a bill to cap noneconomic damages at $1 million, but the governor vetoed it.
This is an issue that affects all transportation companies. Even if you do not suffer a lawsuit yourself, the impact of TPLF, social inflation, and nuclear verdicts may drive up your insurance costs.
Here at Heffernan Insurance Brokers, we’re dedicated to helping transportation companies manage their risks. Learn how we can help you.
