North Carolina Bans Third-Party Litigation Funding: A Legislative Landmark
RIMS, the risk management society, has lauded North Carolina's legislative decision to ban third-party litigation funding (TPLF), marking a pivotal step towards national regulation. The state's Prohibit Litigation Investments Act, effective June 22, 2026, prohibits individuals or entities from participating in litigation investment activities within North Carolina, imposing civil penalties up to $50,000 per violation. Exceptions include pro bono funding, insurance contracts covering defense or indemnification, and financial support not contingent on litigation outcomes.
North Carolina distinguishes itself as the first state to entirely outlaw TPLF, differing from other states with less stringent measures like mandatory disclosures and funder return caps. The legislation received overwhelming legislative support, passing the House unanimously and the Senate with minimal opposition before being endorsed by Governor Josh Stein.
Conversely, states such as Montana have enacted laws requiring funder registration and recovery limits. Meanwhile, West Virginia, Indiana, and Louisiana focus on disclosure and limiting funder influence. New York recently introduced a comprehensive regulatory framework, and the Litigation Funding Transparency Act, a federal measure, is under review by the Senate Judiciary Committee.
RIMS continues to prioritize TPLF as a legislative issue, advocating for increased awareness of its economic impacts and potential risks to intellectual property and organizational risk management. The Society argues that TPLF elevates legal costs, inflates settlement figures, and extends litigation timelines, potentially impacting insurance costs and consumer prices.
Critics, including RIMS, express concerns regarding TPLF arrangements creating conflicts of interest when funders' goals diverge from plaintiffs'. Additionally, there is apprehension about foreign entities potentially influencing the U.S. legal system indirectly, leading to higher litigation expenses.
RIMS President Manny Padilla stated, "Third-Party Litigation Funding disrupts the intended function of our legal system, offering opportunities for external investors to profit at the expense of plaintiffs and businesses, inflating costs and causing financial burdens." He praised North Carolina for addressing these issues and advocated for further progress nationally.
The property and casualty insurance sector has shown particular interest in TPLF due to its link to social inflation, wherein claim costs rise faster than general inflation. According to a Swiss Re report, TPLF contributes to increased loss ratios in areas like excess liability and medical malpractice, resulting in higher premiums for commercial policyholders. Additionally, the NAIC has identified litigation funding as a factor in "nuclear verdicts," or unusually high jury awards.
Industry groups have supported North Carolina's legislative move. The American Property Casualty Insurance Association highlighted the law as protective against predatory TPLF practices, and the Insurance Information Institute noted it delineates the civil justice system as not purely an investment vehicle. Insurers and brokers focusing on commercial liability in North Carolina may benefit from greater predictability in claim severity, with other states possibly monitoring the law's impact as it faces initial legal challenges.