Third-Party Litigation Funding: What Policyholders Should Know Before Suing Their Insurer

Filing a lawsuit against an insurance company is expensive. Depositions, expert witnesses, document review, court reporters, filing fees — the costs add up quickly, and the insurance company knows it. Carriers have entire legal departments, panels of outside defense firms, and functionally unlimited litigation budgets. The policyholder, meanwhile, is already financially strained — because the insurer has denied or underpaid the very claim that was supposed to make them whole. This asymmetry is not accidental. It is a feature of the system that benefits insurers, and it is the reason many legitimate claims are never litigated.

Third-party litigation funding — sometimes called legal funding, lawsuit lending, or litigation finance — is a mechanism that addresses this imbalance. A third-party funder provides capital to a plaintiff (or the plaintiff’s law firm) to cover the costs of pursuing a lawsuit. In exchange, the funder receives a portion of any recovery. If the case is lost, the policyholder typically owes nothing. For policyholders facing bad faith insurance practices and lacking the resources to fight back, litigation funding can be the difference between accepting a lowball settlement and pursuing the full value of a claim.

How Third-Party Litigation Funding Works

The basic structure of litigation funding is straightforward. A policyholder (or their attorney) applies to a litigation funding company. The funder evaluates the merits of the case — the strength of the legal claims, the likely damages, the defendant’s ability to pay, and the expected timeline. If the funder determines that the case has sufficient merit and potential recovery, it offers to advance capital in exchange for a contractually defined share of any settlement or verdict.

There are two primary models. In the first, the funder provides money directly to the plaintiff for living expenses and personal needs while the case is pending. This is sometimes called “consumer litigation funding” or “pre-settlement funding.” In the second model, the funder provides capital directly to the law firm to cover case costs — expert fees, deposition expenses, court filing fees, and the other expenses of prosecuting the case. This is sometimes called “commercial litigation funding” or “portfolio funding” when applied across multiple cases.

In both models, the defining feature is that the funding is non-recourse. If the case is lost — if the policyholder recovers nothing — the funder typically receives nothing, and the policyholder does not owe the money back. The funder bears the risk of loss. This is what distinguishes litigation funding from a traditional loan: there is no obligation to repay if the case does not succeed.

The Scale of the Litigation Funding Industry

Litigation funding is no longer a niche product. The global litigation finance market was projected to reach $18.9 billion in 2025 and is expected to exceed $67 billion by 2037. Major institutional funders now include publicly traded companies, hedge funds, and private equity firms. The growth of the industry reflects a simple economic reality: there is enormous unmet demand from plaintiffs who have meritorious claims but lack the resources to pursue them against well-capitalized defendants — and insurance companies are among the most well-capitalized defendants in existence.

For insurance disputes specifically, litigation funding has become increasingly relevant as claim denials and underpayments have grown more aggressive. When an insurer knows that a policyholder cannot afford to litigate, it has every incentive to lowball the claim or deny it outright. Litigation funding removes that leverage. A funded policyholder can retain top-tier counsel, hire the best experts, and pursue the case through trial if necessary — and the insurer knows it.

How Funders Evaluate Insurance Disputes

Not every insurance claim will attract litigation funding. Funders are investors, and they evaluate cases the way any investor evaluates an opportunity: by assessing the risk-adjusted return. For an insurance dispute, a funder will typically consider:

• Claim strength: Is there clear evidence that the insurer breached the policy or acted in bad faith? The stronger the documentation, the more attractive the case is to a funder.
• Potential recovery:Is the claim large enough to justify the funder’s involvement after accounting for the funder’s share, attorney fees, and costs? Funders generally look for cases with potential recoveries significantly above the expected litigation costs.
• Insurer solvency: Can the insurance company pay a judgment? For most standard carriers, solvency is not an issue, which makes insurance disputes attractive to funders compared to cases against undercapitalized defendants.
• Timeline: How long will the case take? Funders prefer cases that will resolve within a reasonable timeframe, because their return is affected by how long their capital is deployed.
• Jurisdiction: Some jurisdictions are more favorable to policyholders than others. A bad faith claim in California, where extracontractual damages and attorney fees are available, will be more attractive to a funder than the same claim in a state with more limited remedies.

Recent Legislation and Regulatory Developments

The rapid growth of litigation funding has drawn significant legislative attention. Several states have enacted or proposed laws regulating the industry, and the insurance industry itself has pushed aggressively for disclosure requirements and restrictions. Policyholders should understand the current regulatory landscape because it directly affects how — and whether — they can access funding.

New York Consumer Litigation Funding Act (December 2025)

New York signed the Consumer Litigation Funding Act into law in December 2025. The Act imposes registration requirements on litigation funding companies, caps fees and charges, requires clear written disclosures to consumers about the terms of the funding agreement, and establishes a right of rescission. The law is designed to protect consumers who may not fully understand the cost of funding or the portion of their recovery that will go to the funder. For policyholders in New York considering litigation funding, this law provides a meaningful layer of consumer protection that did not previously exist.

Georgia SB 69: Financier Registration

Georgia enacted SB 69, which requires litigation funding companies to register with the state and comply with disclosure requirements. The law establishes oversight of the industry while preserving access to funding for plaintiffs who need it. This type of registration-based approach — rather than an outright ban — reflects the growing consensus that litigation funding serves a legitimate purpose but requires regulatory guardrails.

ISO Litigation Funding Disclosure Endorsement

The Insurance Services Office (ISO) has introduced a litigation funding disclosure endorsement that can be attached to insurance policies. This endorsement requires policyholders to disclose whether they have obtained litigation funding as a condition of coverage or claims handling. The insurance industry’s interest in these endorsements is transparent: insurers want to know when a policyholder has the financial backing to litigate, because it changes the insurer’s risk calculus. Policyholders should review their policies carefully for any such endorsement and understand its implications before entering into a funding arrangement.

The Advantages of Litigation Funding for Policyholders

For policyholders facing a well-funded insurance company, litigation funding offers several significant advantages:

• Access to justice:The most fundamental advantage is that it allows policyholders who cannot afford litigation costs to pursue claims they would otherwise have to abandon. A policyholder whose home was destroyed and whose claim was denied may not have the resources to pay for expert witnesses and depositions — litigation funding makes the case possible.
• Leveling the playing field:Insurance companies routinely use their financial advantage to outlast policyholders. They file motions, take depositions, retain multiple experts, and drag out proceedings knowing that the policyholder is under financial pressure to settle cheaply. A funded policyholder can match the insurer’s litigation resources.
• No risk of repayment if the case is lost: Because funding is non-recourse, the policyholder does not face the risk of owing money if the case is unsuccessful. The funder absorbs the loss.
• Better settlement leverage: When an insurer knows that a policyholder has funding and will not be forced to settle early out of financial desperation, the insurer is more likely to negotiate seriously and offer fair value.
• Ability to hire top counsel: Some attorneys will only take cases on a contingency basis if the costs are covered. Litigation funding can attract attorneys who would otherwise decline the case due to the cost burden.

The Disadvantages and Risks

Litigation funding is not without costs and risks. A policyholder considering this option should weigh the following carefully:

• Substantial cost:The funder takes a significant portion of any recovery. Depending on the terms and the duration of the case, the funder’s share can be substantial. After the funder’s cut, the attorney’s contingency fee, and litigation costs, the policyholder’s net recovery may be considerably less than the gross settlement or verdict amount.
• Potential influence on litigation strategy:While ethical rules generally prohibit funders from controlling litigation decisions, the practical reality is more nuanced. A funder with a significant financial interest in the outcome may have opinions about settlement timing, case strategy, and which claims to pursue. The policyholder’s attorney has an ethical duty to the client, not the funder — but the dynamic can create tension.
• Disclosure risks:As noted above, some policies and jurisdictions require disclosure of funding arrangements. Disclosure alerts the insurer that the policyholder has resources to litigate, which can be a double-edged sword — it may lead to better settlement offers, or it may cause the insurer to litigate more aggressively.
• Selective case acceptance: Funders only accept cases they believe they will profit from. This means that smaller claims, claims with uncertain liability, or claims in less favorable jurisdictions may not attract funding even if they are meritorious.
• Complexity of funding agreements: Funding agreements can be complex financial instruments with terms that are not always intuitive. The effective cost of funding can be difficult to calculate without careful analysis. A policyholder should never sign a funding agreement without having their attorney review it.

When Litigation Funding Makes Sense for Insurance Disputes

Not every insurance dispute is a good candidate for litigation funding. The cases where funding makes the most sense share certain characteristics:

• Large bad faith claims with strong evidence: A bad faith claim with clear documentation of unreasonable conduct — internal adjuster notes, lowball offers well below proven damages, repeated delay tactics — is exactly the type of case funders are looking for. The potential for extracontractual damages and punitive damages in bad faith cases makes the expected recovery attractive.
• Total loss disputes with clear underpayment: When an insurer has denied or significantly underpaid a total loss claim and the policyholder has strong evidence of the actual loss value, the gap between what was paid and what is owed creates the recovery potential that funders need to justify their investment.
• Cases where the policyholder cannot afford to wait: If a policyholder needs funds for living expenses, temporary housing, or other necessities while the case is pending, consumer litigation funding can provide a financial bridge.
• Cases where litigation costs are prohibitive:Some insurance disputes require expensive experts — forensic engineers, building consultants, financial analysts. If the cost of proving the case exceeds what the policyholder or attorney can bear, commercial litigation funding targeted at case costs can make the difference.

Alternatives to Litigation Funding

Before pursuing litigation funding, policyholders should consider alternatives that may be less costly:

• Contingency fee attorneys: Many insurance dispute attorneys work on a contingency fee basis, meaning they advance case costs and collect their fee only if the case is successful. If a contingency attorney is willing to absorb the case costs, the policyholder may not need separate litigation funding. The attorney’s contingency fee alone — while significant — is typically less than the combined cost of a contingency fee plus a litigation funder’s share.
• Public adjuster representation:For many first-party property claims, hiring a licensed public adjuster can resolve the dispute without litigation altogether. A public adjuster works directly with the insurance company to negotiate a fair settlement and charges a fee based on the recovery. If the claim can be resolved through negotiation, appraisal, or other pre-litigation methods, the cost is substantially less than litigation — funded or otherwise.
• Appraisal: Many property insurance policies include an appraisal provision that allows disputes over the amount of loss to be resolved through a binding appraisal process. This process is faster and cheaper than litigation, and it does not require litigation funding.
• Department of Insurance complaints: Filing a complaint with the state Department of Insurance can sometimes prompt an insurer to re-evaluate a claim without litigation.

The Insurance Industry’s Perspective on Litigation Funding

It should not surprise anyone that the insurance industry is the most vocal opponent of litigation funding. Insurers and their trade groups have lobbied aggressively for mandatory disclosure requirements, fee caps, and in some cases outright bans on litigation funding. The industry frames its opposition in terms of consumer protection — arguing that funders charge excessive fees and may exert undue influence over litigation — but the underlying concern is economic. Litigation funding threatens the business model that depends on policyholders being unable to afford to fight back.

When an insurer denies a legitimate claim worth $200,000 and the policyholder does not have the resources to litigate, the insurer saves $200,000 (minus whatever nominal settlement it might offer to make the claim go away). Litigation funding disrupts this calculus. A funded policyholder can pursue the claim to its full value, and the insurer faces not just the original claim amount but potential bad faith damages and attorney fees on top of it.

Discovery and Litigation Funding

One of the most contested issues in litigation funding is whether the existence and terms of a funding agreement must be disclosed to the opposing party during discovery. Insurers routinely seek discovery of funding agreements, arguing that the agreements are relevant to the plaintiff’s credibility, potential bias, and the funder’s influence over litigation decisions. Policyholders and their attorneys typically resist disclosure, arguing that the agreements are irrelevant to the merits of the claim and that forced disclosure chills access to funding.

Courts have reached different conclusions on this issue. Some have ordered disclosure of the existence of funding arrangements (but not the financial terms), while others have denied discovery altogether. The trend in many jurisdictions is toward some level of disclosure, particularly in federal courts. Policyholders should discuss this issue with their attorney before entering into a funding arrangement.

Practical Steps for Policyholders Considering Litigation Funding

• Consult an attorney first: Before approaching any litigation funder, a policyholder should consult with an attorney experienced in insurance disputes. The attorney can assess whether litigation funding is necessary, whether the case is likely to attract funding, and whether better alternatives exist.
• Compare multiple funders: Litigation funding is a competitive market, and terms vary significantly between funders. A policyholder should compare offers from multiple funders before committing.
• Understand the total cost:The policyholder should calculate the net recovery after the funder’s share, the attorney’s fee, and case costs. If the combined deductions would leave the policyholder with a recovery that does not meaningfully address their loss, funding may not be worthwhile.
• Read the agreement carefully:Funding agreements should be reviewed by the policyholder’s attorney. Key terms to scrutinize include the funder’s percentage or multiplier, whether the funder’s share increases over time, what triggers repayment, and what rights the funder has regarding settlement decisions.
• Check the funder’s track record: Not all funders are reputable. A policyholder should verify that the funder is established, registered where required, and has a track record of transparent dealing with plaintiffs.