Outside Investors Are Turning Small Business Lawsuits Into an Asset Class

No federal rule requires a plaintiff to disclose whether an outside investor is funding a lawsuit. For a small business responding to a claim, that blind spot can shape settlement outcomes without the defendant's knowledge. The arrangement is called third-party litigation funding, or TPLF: investors with no connection to a legal dispute provide money to plaintiffs or law firms in exchange for a share of the proceeds.

Commercial auto premiums rose 10.4% and umbrella premiums rose 9.5% in the first quarter of 2025, the two highest increases across all commercial lines, according to the Council of Insurance Agents and Brokers. Agents and brokers surveyed connected both increases to TPLF exposure. Even a business that's never sued can still pay for this trend through higher premiums, because insurers price TPLF-linked litigation risk into commercial lines across the board. Those 2025 pricing signals are already reflected in small business insurance renewals for 2026.

Third-party litigation funding is a non-recourse financial arrangement. If the case fails, the plaintiff owes nothing back; if it succeeds, the funder takes 20% to 40% of the proceeds, plus interest that can compound at 20% or more a year. This exposure runs through the commercial lines that affect small business insurance costs, primarily commercial auto and umbrella.

TPLF originally took root in complex commercial litigation and class actions, where a single case can require millions in expert witnesses, discovery costs and legal fees over many years. Over the past decade, it has spread into personal injury cases: slip-and-fall incidents, motor vehicle accidents and product liability claims. One study of roughly 200,000 consumer TPLF cases from a single large funder found that about 59% involved motor vehicle accidents, according to Gen Re's August 2025 analysis citing Cornell Law Review research.

Burford Capital, one of the largest publicly traded litigation funders, reported 91% to 93% returns on concluded assets in its 2021 annual report, as cited by Gen Re, though returns vary widely by case and funder. Those returns are also uncorrelated with stock market performance. For hedge funds and private equity firms seeking portfolio diversification, that combination makes litigation funding an attractive allocation.

For small businesses, the defining feature of TPLF is that it's invisible. No federal rule requires plaintiffs to disclose a litigation funder's involvement to the opposing party. The plaintiff's attorney and the funder both know the arrangement. The defendant doesn't.

That lack of disclosure matters most at the settlement stage. A business receiving a settlement demand may have no idea that a funder with a 30% stake has set minimum return thresholds that block any resolution below them. Gen Re's analysis describes the result: plaintiffs who have taken advance money need larger settlements to repay the funder after attorney fees. Early resolution becomes unlikely regardless of case merit.

The scale of funded litigation campaigns became clearer in November 2025, when the National Insurance Crime Bureau and 4WARN published a joint analysis of 783 insurance companies that covered June through August 2025. It found that 74% had been targeted by litigation-related marketing campaigns backed by outside funders. One funder alone supported 13 law firms that targeted 66 different insurers. For small businesses, the link is direct: those campaigns often target commercial auto and general liability claims, the same lines where premiums are rising.

The U.S. Chamber of Commerce Institute for Legal Reform has cited $15.2 billion in domestic commercial litigation investments, a market-size estimate Gen Re repeated in its August 2025 claims-handling analysis.

Westfleet Advisors' 2024 Litigation Finance Market Report put the assets managed by active U.S. funders at $16.1 billion across 42 capital providers as of mid-2024. New capital commitments reached $2.3 billion in 2024, down 16% from 2023 and about 30% below the 2022 peak. Westfleet described the market as tighter than at any point in the past five years.

Insurers point to four main cost pressures from TPLF in commercial auto insurance: claim volume, settlement values, litigation timelines and high opening demands (called “anchors”) that pull jury awards upward. Outside capital can fund more plaintiff-side advertising, which raises claim volume. Once a case is underway, claimants with pre-settlement money have less incentive to accept early offers, since they need a larger payout just to break even after fees and funding costs.

Commercial umbrella coverage absorbs the same pressures. Litigation timelines lengthen when plaintiffs with pre-settlement money have less immediate pressure to settle. When funder-backed attorneys open with unusually high demands, that anchor can reshape how a jury calculates a fair award.

Swiss Re's Social Inflation Index, published in sigma 4/2024, defines social inflation as the growth in liability claims costs beyond what economic factors like wages and medical costs explain. The index shows U.S. liability claims rose 57% over the past decade on that measure. In 2023, social inflation outpaced economic inflation as the main claims cost factor for the first time in two decades. Annual growth hit 7%, the index's highest reading.

TPLF is one of the structural forces Swiss Re identifies behind that trend, along with shifting jury attitudes and expanding theories of liability. Over the five years from 2019 through 2023, U.S. liability lines exposed to bodily injury claims posted cumulative underwriting losses of $43 billion.

The CIAB Q1 2025 survey found that agents and brokers cited TPLF as a factor in commercial auto and umbrella pricing, coverage terms and limits. Carriers have tightened underwriting in general liability, umbrella and commercial auto lines over ongoing exposure concerns. Some have pulled back from heavy-vehicle accounts entirely; they cite litigation funding as a key contributor to their exposure. In 2023 alone, U.S. courts produced 27 verdicts above $100 million, according to Swiss Re.

Swiss Re's 2025 Behavioral Social Inflation Study tested a common underwriting assumption against 1,150 U.S. adults in nationally representative, randomized legal simulations: that small businesses carry lower verdict risk than large corporations. The study found it mostly wrong. Small business owners who rely on a business owners policy (BOP) as their main liability coverage may be carrying less than the verdict data warrants.

Injury severity, not company size, was the main factor in how Swiss Re's respondents set award amounts. In scenarios involving serious injuries such as a broken hip or spinal paralysis, respondents assigned blame and recommended high compensation at nearly the same rate against small local businesses as against large multinational corporations. In a product liability scenario involving severe injury from user error, 40% of respondents still thought the business should pay, versus 24% for a minor injury.

On nuclear verdicts, defined as awards above $10 million, the gap between small and large defendants is narrower than many risk managers expect. Swiss Re found a 25% nuclear verdict rate for small businesses versus 30% for large corporations when a $100 million plaintiff demand was in play. Average awards against small businesses rose from $2.4 million to $13.8 million as the plaintiff anchor moved from $5 million to $100 million.

The study also found that 67% of respondents support punitive damages against small businesses, not just large corporations. Plaintiff attorneys use TPLF capital to fund the anchoring strategies that drive those outsized opening demands.

Small business liability limits written five or 10 years ago may fall short in today's verdict environment. Businesses with litigation-heavy exposure should also review their employment practices liability insurance (EPLI). For service businesses, professional liability insurance warrants the same scrutiny.

Swiss Re describes the U.S. liability claims environment as a “self-reinforcing spiral” in its September 2025 behavioral study. Traditional economic factors (wage growth, medical cost inflation and core CPI) no longer explain how fast liability claims are growing. Public attitudes have shifted in ways that compound what TPLF capital can accomplish at trial.

In 2016, 90% of Americans told Swiss Re researchers there were too many lawsuits in the United States. By 2025, that share had dropped to 56%. Over the same period, the share who said damages awarded in lawsuits were too low or just right rose from 58% to 76%.

Jurors now enter deliberations with a higher floor for what counts as fair compensation. That shift makes the anchoring strategies backed by TPLF capital more effective than they were a decade ago.

The shift is concentrated among younger respondents. Among those under 40, 83% said current damages are too low or just right; among those over 60, that figure was 41%. As younger Americans make up a larger share of jury pools, Swiss Re projects the move toward larger verdicts will continue even if economic conditions change. Political affiliation also mattered: self-identified Democratic respondents set award amounts 25% to 65% higher than Republicans at equivalent plaintiff anchors.

Seven states passed TPLF laws in 2025: Arizona, Colorado, Georgia, Kansas, Montana, Oklahoma and Tennessee. The specifics vary, but most aim to add transparency around litigation funding. Several states include disclosure requirements so defendants and courts can identify funder conflicts of interest.

At the federal level, the Litigation Transparency Act of 2025 (H.R. 1109) was introduced in February 2025. Its latest congressional action was a committee markup on Nov. 19, 2025, and its status remained "Introduced" as of July 20, 2026.

A companion measure, the Protecting Our Courts from Foreign Manipulation Act (H.R. 2675), was introduced in April 2025. As of June 15, 2026, it had been placed on the Union Calendar (Calendar No. 608) and is eligible for House floor consideration. H.R. 2675 would bar foreign government-controlled entities from funding U.S. litigation.

The U.S. Chamber of Commerce Institute for Legal Reform continues to push for federal civil rules changes that would require funder disclosure at the start of every case, according to its October 2025 analysis.

Westfleet Advisors' 2024 report said new capital commitments to TPLF dropped 16% in 2024 from the prior year, and the overall market contracted roughly 30% from its 2022 peak. Even with new commitments down, CIAB respondents still cited litigation funding as a 2025 pricing and underwriting concern. Funder activity and claims resolution run on a lag; cases already in litigation continue to affect rates.

Small businesses can't stop a plaintiff from using a litigation funder, but several steps reduce exposure and help control premiums. The first is reviewing commercial general liability limits against current verdict data for the business's state. Standard limits from five or 10 years ago may not reflect the nuclear verdict environment Swiss Re's 2025 study describes.

Raising umbrella coverage limits is the most cost-efficient way to extend overall liability coverage. Umbrella policies sit above the primary general liability and commercial auto lines and absorb the excess when a verdict exceeds underlying limits.

Operational practices matter as much as coverage limits. Safety manuals, employee training records, maintenance logs, dash cameras for commercial vehicles and well-documented workers' compensation records give defense attorneys material to challenge inflated claims before litigation costs compound. Gen Re's analysis says businesses with thorough safety documentation are more effective at pushing back on inflated demands and resolving cases before funders can extend the timeline.

Conversations with carriers sharpen when a broker tracks TPLF trends by industry and venue. Insurers are watching claim patterns that suggest funded plaintiff recruitment: clusters of soft-tissue injury claims in specific areas or from specific law firms. A broker who can present a business's loss control record helps preserve coverage access as carriers tighten terms in high-exposure lines. For businesses operating commercial vehicles, current commercial auto limits should be benchmarked against the 10.4% rate trajectory CIAB documented in Q1 2025 and the bodily injury severity trend Swiss Re has tracked since 2019.