New York State has enacted legislation regulating third-party litigation funding, a practice that has grown significantly in recent years and has contributed to increased claim costs across multiple lines of insurance.
On December 20, 2025, Governor Kathy Hochul signed the Consumer Litigation Funding Act into law. The statute establishes regulatory standards for companies that provide cash advances to plaintiffs in exchange for a share of future lawsuit recoveries. The law follows years of concern from insurers, policyholder advocates, and consumer groups regarding the lack of oversight in this area.
Background
Litigation funding, also referred to as “lawsuit lending,” allows plaintiffs to receive funds while a lawsuit is pending. These arrangements are usually structured so that repayment is contingent on a recovery. Historically, these arrangements were treated as “investments” rather than loans, meaning they were not subject to traditional lending laws or interest rate caps.
Critics have raised concerns that funding agreements imposed excessive fees and created incentives to prolong litigation or inflate settlement demands. These factors have contributed to rising claim severity and defense costs, with downstream effects on insurance premiums.
Key Provisions of the New Law
The Consumer Litigation Funding Act introduces several requirements intended to increase transparency and protect consumers:
- Litigation funding companies must register with New York State.
- Contracts must include clear disclosures regarding fees, repayment terms, and the plaintiff’s rights.
- Total charges are capped at 25% of the plaintiff’s gross recovery.
- Plaintiffs have a 10-business-day right to cancel funding agreements without penalty.
- Funders are prohibited from influencing litigation strategy, settlement decisions, or attorney-client communications.
Implications for Policyholders
While the law is designed to protect plaintiffs, it also has broader implications for policyholders. By capping fees and restricting funding involvement in litigation decisions, the law aims to reduce artificial inflation of claim values and discourage unnecessary prolongation of disputes.
For insureds, particularly those exposed to liability claims, this reform may help moderate litigation-driven cost pressures over time. However, litigation funding remains legal and available, so the full impact on claims and settlements will depend on enforcement and potential future reforms.
The new law, however, does not currently require disclosure of litigation funding arrangements during active litigation. As a result, insurers and defense counsel may remain unaware of third-party financial interests that could affect settlement negotiations. Industry groups are expected to continue advocating for additional disclosure requirements.
Conclusion
New York’s enactment of litigation funding reform marks a significant shift in the state’s legal and insurance landscape. While not a complete solution, the new law introduces meaningful consumer safeguards and could help curb practices that have contributed to rising litigation costs.
SterlingRisk will continue to monitor developments in this area and keep clients informed about regulatory changes that may impact their coverage and claims. If you have questions about this legislation or its implications for your insurance program, please contact your SterlingRisk representative.
DISCLAIMER: This article is provided by SterlingRisk Insurance for general informational purposes only and should not be construed as legal or insurance advice. Always review your individual policy terms and consult your broker or legal counsel regarding your specific situation.
