Litigation Finance Isn’t a Hidden Tax. It’s a Market Correction.

It feels like every couple of weeks an article appears lamenting the rise of litigation finance as the death of capitalism and the birth of something monstrous.  The most recent chorus began over the summer when the CEO of Chubb called litigation finance “a hidden tax on society” in the editorial pages of the Wall Street Journal.  A month later, the CEO of The Hartford grieved on an investor call that litigation finance has “turned our judicial system into a gambling system.”  And just last month, the American Property Casualty Insurance Association’s Senior Vice President of Federal Government Relations exclaimed:  “Too many baseless claims, filed by lawyers motivated by profit are clogging our legal system with unnecessary lawsuits, increasing costs and delaying swift resolution of genuine legal claims.” 



As someone who has been a big firm defense lawyer, a small firm plaintiff lawyer, and now a litigation funder, I can confidently say that these arguments fundamentally misunderstand litigation finance and its incentives, while simultaneously conflating the interests of large repeat defendants with those of society writ large.

A market correction, not a market distortion. 

Litigation funding corrects a market failure that has long skewed access to justice in favor of those with the deepest pockets.  Complex litigation can cost millions to pursue, meaning that all but the richest corporations and individuals are effectively priced out of the market for justice.  The classic fact pattern is this: a plaintiff has strong claims with clear legal merit, but they just don’t have the financial resources to protect their rights and defend their interests, while the defendant can spend money until the plaintiff runs out or cries uncle.  Litigation finance solves that problem by channeling private capital toward meritorious cases that otherwise could not be brought or litigated to resolution.  Far from distorting the system, litigation funding introduces efficiency and accountability where a profound imbalance in favor of entrenched corporate interests has reigned for decades.



Critics who compare litigation finance to gambling conveniently elide its structural incentives and similarities to other commonly accepted practices.  As an initial matter, we don’t call venture capital or private equity firms gamblers; to the contrary, society generally recognizes that their business is a profoundly difficult profession that requires intellectual rigor, discipline, and discerning judgment.  Litigation funders are no different.  They only get paid if their cases succeed and, as a result, they are risk underwriters who invest only after extensive due diligence, legal analysis, and damages modeling.  By way of limited personal example, my firm funds less than 5% of the litigations that request funding.  That is generally par for the course across the industry. 

A Check on Corporate Risk-Shifting.

It should not be surprising that many of the most vociferous critics of litigation finance are the beneficiaries of the current system’s imbalance—i.e., large, well-capitalized repeat defendants.  These organizations generally thrive on controlling legal exposure and minimizing payouts—even when claims are clearly meritorious.  Litigation finance disrupts that dynamic by giving claimants the financial endurance to see a legitimate case through trial or to a fair settlement.

Accordingly, when Chubb’s CEO calls litigation finance a “hidden tax,” what he really means is that the cost of risk is finally being priced correctly as judgments more closely approximate the harm done.  That is not a tax on society; it is the market doing exactly what it should—allocating costs to those responsible for creating them.



Moreover, litigation finance creates incentives for better corporate governance and compliance.  When companies know that strong claims will not quietly disappear for purely economic reasons, they have a stronger incentive to adhere to laws, contracts, and ethical standards.  That deterrent effect benefits society as a whole, not just plaintiffs and their backers.

Aligning incentives to enhance justice.

Another common critique is that litigation finance “monetizes” justice, turning the courtroom into a marketplace or, as The Hartford’s CEO called it, “a gambling system.”  But this framing misses the forest for the trees.  Justice has always been a capital-intensive effort.  The question is not whether money influences litigation, but whether that influence is merit-based and available to both sides.

Funders’ incentives are fully aligned with those of plaintiffs and their lawyers: they all succeed only if the claim succeeds.  This alignment weeds out weak claims and enforces strategic discipline, while also ensuring that only cases with real merit receive backing.  Funders, like all good investors, are highly rational and have no interest in clogging the courts with meritless claims; to the contrary, they are interested in winning, which means funding only strong, legally sound claims.  If anything, the availability of third-party capital makes the justice system more meritocratic by allowing the strength of a case, not the size of a parties’ wallet, to determine its outcome.

At bottom, litigation finance is not a parasite on capitalism; it is a product of it.  It uses capital markets to promote accountability, deterrence, and the rule of law—the very foundations of a functioning economy.  Viewed through this lens, the discomfort it provokes among entrenched interests is not a bug, but a feature that reveals the pain points in a significant market correction.  Put simply, litigation finance is not a “hidden tax” on society, but rather a long-overdue dividend for the little guy.