Court Ruling Enhances Insurance Transparency in Litigation Funding

A recent decision by the U.S. 11th Circuit Court of Appeals may significantly impact the insurance industry by enhancing efforts to identify parties involved in litigation funding and medical facilities allegedly engaged in auto insurance fraud. The court upheld the 2020 Corporate Transparency Act (CTA), which mandates certain corporations to disclose their beneficial owners, rejecting prior lower court findings that deemed the Act unconstitutional.

The CTA and Economic Transparency

The ruling clarifies that the CTA, by necessitating the disclosure of corporate ownership, affects economic activities relevant to interstate commerce. It addresses concerns around anonymity in business dealings, thereby supporting the insurance sector's attempts to trace ownership structures behind entities involved in litigation and potential insurance fraud. However, further legislative actions at the state level may still be required to ensure comprehensive transparency.

Limited Public Disclosure and State-Level Legislation

While the CTA requires ownership information to be submitted to the U.S. Treasury, it does not automatically make it accessible to the public or private litigants. Disclosure is limited, and particular exemptions, such as for insurance firms and large companies, reduce its scope. This limitation underscores the need for additional state legislation to impose further disclosure requirements, particularly on litigation funders. Some states have already enacted such regulations, integrating them into broader tort-reform legislation.

Challenges in Key States

Despite these developments, states like Florida, notorious for insurance-related legal controversies, have not yet adopted these measures. Previous proposals to enforce disclosure of litigation funding failed to progress, highlighting the challenges insurers face in combating practices like staged accidents, often intertwined with undisclosed funding arrangements and ownership structures of medical providers.

Advancing Transparency and Accountability

Certain states have allowed limited discovery into the identity of litigation financiers during legal proceedings. However, only a few have implemented comprehensive requirements similar to Georgia's recent law, obliging funders to register and disclose detailed information, thereby ensuring greater transparency and accountability. The industry continues to advocate for more rigid transparency standards, especially given the complexity of corporate layers that obscure true ownership.

Insurers and legal professionals involved in defense must navigate a landscape where obtaining clear disclosure remains complicated by the opaque structures of corporate ownership and state variances in regulatory compliance requirements. The appeals court's ruling is a step towards mitigating fraud risks, emphasizing the ongoing need for focused regulatory improvements to safeguard transparency in litigation and related financial activities.