Amid amendments proposed by U.S. Senate Republicans to President Donald Trump’s tax legislation, new provisions aim to close a tax loophole benefiting third-party litigation funders.
According to language unveiled Monday by Senate Finance Committee Chair Mike Crapo (R-Idaho), the budget reconciliation bill will include measures to tax the profits earned by litigation funding companies.
The insurance sector has frequently criticized litigation funding—where third parties invest in lawsuits in exchange for a portion of settlements or judgments—as a major factor driving up litigation expenses. Because there is no federal mandate requiring disclosure of litigation funding agreements in court proceedings, the full scope of the practice remains unclear. However, litigation financing consultant Westfleet reported that assets under management in this sector reached $16.1 billion in 2024.
Currently, third-party litigation funding (TPLF) contracts are structured so that funders can evade partial or full U.S. taxes on their earnings. Critics argue that litigation funders often pay lower taxes on their share of lawsuit awards than the plaintiffs themselves. This tax advantage is even greater for foreign investors, who reportedly avoid taxation altogether.
Related: Court Orders Begin to Reveal ‘Startling’ Data on Litigation Funding Sources
Jimi Grande, Senior Vice President of Federal and Political Affairs at the National Association of Mutual Insurance Companies (NAMIC), stated that for over a year, the trade group has viewed tax reform as a prime opportunity to tackle a major issue undermining the court system at the cost of numerous industries and consumers.
“Abuse of the legal system costs American households thousands of dollars annually, and third-party litigation funding for profit is a significant contributor to these costs,” Grande said. “We commend Senate Republicans for taking action to close this tax loophole, which has been exploited by predatory funders—many of whom are foreign—to the detriment of the U.S. judicial system and hardworking Americans.”
Related: Most Americans Support Legal Reforms Targeting Practices Like Litigation Funding: Survey
The American Property Casualty Insurers Association (APCIA) has also prioritized combating legal system abuses, including TPLF. Regarding the recent legislative effort, Sam Whitfield, APCIA’s Senior Vice President of Federal Government Relations, told Insurance Journal, “Closing this tax loophole is vital to restoring fairness in the civil justice system and reducing costs. APCIA applauds the Senate for backing reasonable reforms against legal system abuses and including this legislation in the reconciliation package.”
A recent consumer guide on legal system abuse by the Insurance Information Institute (Triple-I) and Munich Re US estimates that legal system abuse adds about $6,664 annually to the cost of goods and services for each American household, and imposes $160 billion in tort costs on small businesses.
Earlier this month, Representative Kevin Hern (R-Okla.) introduced HR 3512, known as the Tackling Predatory Litigation Funding Act. Senator Thom Tillis (R-N.C.) has introduced a companion bill in the Senate. Both proposals focus on taxation, aiming to levy litigation funders’ profits at the highest individual income tax rate of 37% plus an additional 3.8%.