Legal Finance and Insurance: Bridging Misunderstandings to Foster Real Collaboration

Legal Finance and Insurance: Where Confusion Clouds Collaboration

When leaders from the insurance and legal finance worlds sat down at the Insurance Insider US Executive Business Club roundtable, a familiar tension filled the room. For years, insurers have eyed legal finance with suspicion, seeing it as a driver of runaway verdicts and spiraling claims costs. But as the dialogue unfolded, it became clear that much of this conflict springs from misunderstanding, not malice. In fact, these industries are more alike—and more intertwined—than many realize.

Unpacking Legal Finance: Three Distinct Models, One Overlooked Reality

At the heart of the confusion lies a basic misreading of what legal finance actually is. David Perla of Burford Capital and Dai Wai Chin Fenman of Parabellum Capital, two leading voices in the field, stress that legal finance is not a monolith. It’s an umbrella term for three very different forms of financing, each with its own users, risk profiles, and implications for insurers:

• Commercial funding: This segment provides non-recourse capital for large, complex business-to-business disputes—think antitrust, patent, and trade secret cases. These are high-stakes, capital-intensive matters, rarely involving insurance on either side. Funders here are selective, backing only the strongest cases, and sometimes work symbiotically with insurers on products like judgment preservation insurance to wrap recoveries and provide liquidity.
• Consumer funding: Here, small non-recourse advances help individuals cover living expenses during personal injury cases. These matters do often involve insurance, and returns are interest-based. Notably, commercial litigation finance firms typically do not operate in this space.
• Law firm lending: This is the realm of recourse loans for law firms, supporting working capital and case expenses, especially in mass tort and injury practices.

To conflate these models, Perla and Fenman argue, is like confusing life insurance with property/casualty insurance—both transfer risk, but in fundamentally different ways.

The Insurance Industry’s Concerns: Perception vs. Reality

So, why does the insurance industry care so deeply about legal finance? The roundtable revealed three prevailing theories:

• Mass tort liability: Large insurers like Chubb face significant exposure to mass tort claims—such as asbestos, environmental, and abuse cases. The expansion of these claims, aided by legal finance-backed marketing, has increased both the size and complexity of multi-district litigations (MDLs). However, Perla and Fenman emphasize this is more a structural issue with the MDL system than a direct consequence of legal finance.
• Opacity and perception: The relative opacity of the legal finance sector gives insurers and their allies a convenient target. Calls for transparency and regulation often mask broader defensive strategies to control litigation costs, even when actual links to “social inflation” remain unproven.
• Defense interests: Organizations like the U.S. Chamber of Commerce have taken up the banner against legal finance, often at the urging of companies that are frequent defendants in major lawsuits. For these players, the battle is less about insurance, and more about preserving a resource advantage in the courtroom.

Despite these concerns, there’s little concrete evidence tying legal finance to inflated verdicts or increased claims costs, as Carrier Management notes. In fact, the commercial legal finance market remains tiny compared to the vast scale of the insurance and risk industries.

Common Ground: A Shared Stake in Civil Justice

The roundtable participants agreed on one critical point: both legal finance and insurance ultimately serve the same societal goal—a fair, efficient civil justice system. Funders, like insurers, are in the business of underwriting risk, not gambling. They back only the most meritorious cases, and, contrary to popular belief, have no control over the litigation process itself. Their agreements are typically passive investments, bound by contract and ethical rules, with little access to sensitive case materials due to protective court orders.

This nuanced reality challenges the narrative of legal finance as a destabilizing force. In fact, there are areas—such as judgment preservation and collateral protection insurance—where the two industries already collaborate to mutual benefit, providing corporate litigants with critical liquidity and risk management tools.

Looking Forward: Facts Over Fear, Dialogue Over Division

The message from the roundtable was clear: facts must drive the conversation, not speculation or fear. Boycotts and legislative efforts to restrict legal finance often miss the mark, targeting an industry that is both smaller and more specialized than critics assume. Rather than adversaries, insurers and legal finance providers could be partners in a more balanced, transparent system.

As the legal landscape evolves, both sides are being called to engage directly, challenge assumptions, and build new frameworks for collaboration. The stakes are high—not just for insurers or funders, but for the integrity of the justice system itself.

In the end, the real opportunity lies in moving past entrenched positions and finding common cause. When legal finance and insurance choose clarity over confrontation, they not only serve their own interests but also reinforce the foundation of civil justice. The future depends on their willingness to listen, adapt, and work together.