Despite mounting pressure from business coalitions, insurers, and tort reform advocates, efforts to bring oversight to California’s multi-billion-dollar litigation funding industry have once again failed in Sacramento.
For the second legislative session in a row, reform proposals aimed at regulating third-party legal financing stalled, leaving many in the business and insurance communities frustrated. Critics argue that unchecked litigation funding is driving up litigation costs, distorting incentives, and fueling an environment where lawsuits become less about justice and more about speculation.
Commentators warn that the unchecked growth of litigation funding is a major factor behind: rising insurance premiums, carriers exiting California’s market, escalating costs of doing business in an already challenging regulatory environment
What’s more, this isn’t just a California problem; it’s a national issue, with ripple effects across industries and jurisdictions.
The failure to act represents a missed opportunity to restore balance and transparency in litigation and protect businesses already grappling with high costs and regulatory burdens.
Understanding Litigation Funding
Litigation funding, sometimes referred to as third-party litigation financing (TPLF), is a financial arrangement in which an outside investor—often a specialized funding company, hedge fund, or private equity group—provides money to a plaintiff or law firm to cover the costs of pursuing a lawsuit. These costs may include attorney fees, expert witnesses, discovery expenses, and even living expenses for the claimant. In exchange, the funder receives a share of any settlement or judgment. If the case is unsuccessful, the funder typically recovers nothing, making it a non-recourse investment tied to the outcome of litigation.
How Does it Work in Practice?
The process usually begins when a plaintiff or their attorney approaches a litigation funding company with details of a potential claim. The funder conducts due diligence, assessing the merits of the case, the likelihood of recovery, and the estimated damages at stake. Based on this risk assessment, the funder offers financing, either a lump sum or staged payments, under a contract that specifies the percentage or multiple of recovery owed if the case succeeds. Because the funder’s return depends entirely on the outcome, it assumes a role more akin to an investor than a lender, though critics argue the financial incentives can distort litigation strategy.
Heart of the Debate
At issue is the rise of non-recourse lawsuit loans and third-party litigation investments, often provided to plaintiffs in personal injury, wrongful termination, and other tort-based actions. These financial arrangements are typically repaid with substantial interest only if the plaintiff obtains a recovery. While proponents argued litigation funding expands access to justice by helping financially strapped individuals pursue meritorious claims, insurers and defense lawyers contend that these arrangements:
- Prolong litigation timelines, as plaintiffs feel less pressure to settle early.
- Complicate negotiation, as third-party investors may exert influence behind the scenes.
- Drive up claim values and jury demands, particularly in venues already known for high verdicts.
- Provide incentives to bring suit and maintain lawsuits not based on an individual plaintiff's belief of compensation for harm incurred but increased monetary recovery due to third party speculators interested not in seeking redress for harm but the largest financial return for their investment.
Yet in California, where litigation finance remains largely unregulated, efforts to impose oversight have repeatedly faltered in the face of coordinated opposition by the plaintiff bar. This lack of regulatory oversight adds another layer of concern, as agreements often remain confidential and shield funders from disclosure in court. This tension between access to justice and potential abuse makes litigation funding one of the most debated issues in modern civil litigation.
AB 743: Outcome Uncertain
Most recently, Assembly Bill 743, introduced in the 2025 legislative session, remains under review in committee. Backed by the American Property Casualty Insurance Association (APCIA) and other business interests, the bill would create a licensing framework for litigation funders, requiring surety bonds of at least $250,000 and scaling upward based on the value of the funding provided.
For employers and businesses across California, AB 743 represents a potential safeguard against practices that drive litigation costs higher and force disputes into trial rather than early resolution. While 743 is still technically alive, it faces fierce opposition from the Consumer Attorneys of California (CAOC) and other plaintiff-side groups, who argue the proposal is overly burdensome. Opponents also claim bill sponsors have not been transparent about amendments that could further restrict plaintiffs' access to financial resources. This plaintiff side argument runs contrary to the reality that permitting the proliferation of speculative profiteering incentivizes seeking a maximum monetary return on investment over seeking redress for the harm suffered by injured plaintiffs.
SB 581: The 2023 Effort that Failed
The uncertain fate of AB 743 follows the earlier defeat of Senate Bill 581, introduced in the 2023-2024 legislative session. That proposal, also championed by insurers and business groups, was even more direct in its effort to restrict litigation financing. SB 581 never made it to a floor vote, stalling in committee despite support from the Civil Justice Association of California, which has repeatedly cited California's ranking as one of the nation's most hostile legal environments for civil defendants.
A Competing Bill Advances: AB 931
While insurer-backed proposals struggle, the CAOC has put forward its own legislation, Assembly Bill 931, introduced in the 2025 session and currently working its way through committee, would create the California Consumer Legal Funding Act, a framework that purports to regulate lawsuit lending and funding.
AB 931 would:
- Require disclosure of financing terms to the plaintiff and their counsel.
- Prohibit prepayment penalties and kickbacks between attorneys and funders.
- Forbid financial collusion between lawyers and lenders.
- Require the plaintiff's attorney to approve the financing agreement in writing.
Notably, AB 931 does not impose caps on interest rates, nor does it limit the availability or volume of litigation funding, a key concern for defense counsel and insurers. Critics argue that the bill's light touch approach offers the appearance of regulation while preserving the status quo.
Missed Federal Opportunity
Efforts to regulate litigation funding have also encountered obstacles at the federal level. A provision in the GOP-sponsored "One Big Beautiful Bill Act," signed into law in 2025, originally included a 40.8% excise tax on third-party litigation funders. That provision was ultimately struck from the final version of the bill following a Byrd Rule challenge and objections from the Senate parliamentarian. It was determined that the tax provision did not meet the requirements for inclusion in a reconciliation bill. As a result, the Senate removed the provision from the bill.
The Bigger Picture for Business
Businesses across industries, large and small, remain on the receiving end of lawsuits artificially prolonged and financially bolstered by third party investors. With outside funders incentivized to hold out for larger verdicts, cases that might have once settled efficiently now often proceed to trial, raising defense costs, delaying resolution, and exposing businesses to nuclear jury awards. These dynamics not only affect the companies directly involved in litigation but also ripple outward, driving up not only insurance premiums, but the overall cost of doing business in an already challenging economic climate.
California is not alone in grappling with this issue. States including Florida, New York, and Texas have considered or enacted varying forms of litigation funding oversight, recognizing the systematic impact the practice has on business climates and judicial efficiency. California's failure to move forward with substantive reform leaves it behind the curve, reinforcing its reputation as one of the most difficult states in which to defend civil litigation.
The failure of SB 581 and the uncertain future of AB 743 and 931 represent a broader pattern. Plaintiff groups continue to successfully frame litigation financing as a tool of economic justice, while insurers and business advocates struggle to gain traction for reform proposals focused on transparency, ethical boundaries, and cost containment.
The stakes are significant. Unregulated financing can distort settlement dynamics, extend the life of otherwise resolvable cases, and increase exposure to so-called "nuclear verdicts," especially in jurisdictions like Los Angeles and San Francisco, which rank as some of the most challenging venues for civil defendants nationwide.
Defense counsel should anticipate continued use of third-party funding, often undisclosed, and must remain vigilant in identifying its presence during discovery and negotiations. Where appropriate, defense teams may consider pressing courts for disclosures or leveraging existing ethical rules to challenge improper financial entanglements.
Looking Ahead
With AB 931 gaining momentum and AB 743 hanging in the balance, California's approach to litigation funding remains in flux. Through it all one trend is clear, efforts to impose meaningful oversight on the industry will continue to face stiff resistance from the plaintiffs' bar. Those seeking reform may need to recalibrate their legislative strategy and reframe regulation not as an effort to restrict access to justice, but as a necessary measure to protect consumers, provide transparency, preserve judicial integrity, and control runaway litigation costs.
