Insurance industry coalition calls on US Congress to close litigation finance tax 'loophole'

By David Bull

June 13 - (The Insurer) - A coalition of companies including Chubb and Marsh McLennan, along with industry trade bodies and other U.S. businesses, has written to Republican congressmen in support of tort reforms that would close a tax “loophole” for litigation finance funds.

The 40-plus signatories to the letter, sent to Senator Thom Tillis and Representative Kevin Hern, include insurers CNA, Allstate, Liberty Mutual, The Hartford, Travelers, State Farm, Westfield Insurance and several Fairfax Financial carriers.

The Council of Insurance Agents & Brokers, the Independent Insurance Agents & Brokers of America, the National Association of Mutual Insurance Companies and the Reinsurance Association of America were also among the signatories.

The proposal to tax profits earned by litigation financiers was initially introduced by Tillis and Hern as a standalone bill, with the letter encouraging lawmakers to include the measure in the pending reconciliation package as part of the budget bill being worked on in Washington, DC.

The letter, dated June 11, 2025, said: “By closing the current loophole that allows U.S. both domestic and foreign litigation funders to pay the capital-gains or other tax-advantaged rate – or no U.S. tax at all – on litigation payouts, your legislation will help curb abusive lawsuits and level the playing field for American companies.”

It highlighted the explosion of third-party litigation funding in recent years, stating that private investment funds have been able to chase outsized returns often averaging 25% “by financing meritless or purely speculative claims”.

It said that by the end of last year, investors had committed around $16.1 billion to U.S. commercial litigation.

“These arrangements not only drive up legal costs for businesses (costs ultimately borne by workers, consumers, and shareholders) but also invite foreign capital – sometimes from sovereign wealth funds – to treat our courts as a low-risk casino, profiting at the expense of American enterprise,” it continued.

The letter stated that by aligning the tax treatment of litigation funders with that of plaintiffs, the proposed legislation would remove the incentive that encourages “excess litigation” rather than productive investment in job-creating enterprises.

“It would also help ensure that foreign adversaries cannot bankroll lawsuits against U.S. companies without contributing their fair share to the U.S. Treasury,” it continues.

Hern introduced HR 3512 – the Tackling Predatory Litigation Funding Act – to the House of Representatives in late May with Tillis leading the companion bill in the Senate.

In a June 2 statement, Hern said: “Third party funders shouldn't be allowed to meddle tax-free in the American legal system. Frivolous lawsuits have gotten out of control in recent years, largely because of these third-party funders fueling a market that is ballooning. Taxing these third-party entities will limit unmeritorious lawsuits and provide economic relief to the middle class.”

Tillis said: “Predatory litigation financing allows outside funders, including foreign entities, to profit off our legal system, driving up costs and delaying justice. This legislation will bring much-needed transparency and accountability by taxing these profits and deterring abusive practices that undermine the integrity of our courts.”

The proposed bill would tax profits at the highest individual income tax rate of 37% plus 3.8%. It would only apply to third-party funders of lawsuits with formal financing agreements and not to lawyers or parties directly involved in the case, said the statement.

The legislative proposal has the support of a coalition of 18 consumer, free-market and taxpayer organisations, it added.