When the big tax overhaul signed into law on July 4 rolled out, one notable change that didn’t make the cut was a tax hike on third-party litigation funders. These companies put money into lawsuits and, in return, get a share of any settlement or judgment. The plan was to tax their profits at nearly 41%, but that part was dropped from the final bill.
Critics say litigation funders, especially those from overseas, don’t pay enough tax — or sometimes none at all — on the money they make from U.S. lawsuits. Insurance companies, in particular, blame these funders for driving up legal costs. A recent guide from the Insurance Information Institute and Munich Re US says that this abuse of the legal system costs each American family about $6,664 more in everyday expenses. Small businesses, meanwhile, face a $160 billion price tag in tort costs.
The insurance industry hoped that tax reform would help discourage third-party funding. Jimi Grande, a top official at the National Association of Mutual Insurance Companies, called the removed tax changes a potential win for the government, consumers, and businesses. But just before the House voted, the Senate parliamentarian ruled the tax hike violated the budget rules. So, it was taken out.
Grande criticized the decision as influenced by misinformation and political games, as well as by groups profiting from the current system. He warned that leaving this “foreign funder loophole” open allows billions of dollars to keep flowing into costly, often abusive lawsuits, with foreign investors avoiding U.S. taxes. He said this pushes average Americans to foot the bill as litigation funders and trial lawyers continue their work, making the legal world more litigious and expensive.
On the other side, the International Legal Finance Association, which represents litigation funders, welcomed the removal. They called it a “clear victory for Americans,” arguing that these funders help everyday people and small businesses stand up to big companies like tech giants, pharmaceutical firms, and insurers who might dodge responsibility for wrongdoing. The group said that taxing litigation funders would hurt consumers by shifting power to these large industries.
For now, the tax status of third-party litigation funders remains unchanged, leaving the debate open about fairness and how to control rising legal costs in the U.S.