A new report by global law firm Dentons LLP is raising red flags about the growing influence of third-party litigation funding in Canada. Commissioned by the Insurance Bureau of Canada (IBC), the report explores how litigation funding, once seen as a tool for justice, is now creating significant ripple effects in the commercial insurance industry.
How Litigation Funding is Evolving in Canada
In recent years, law firms in Canada have increasingly turned to third-party funders to finance lawsuits that might otherwise not proceed. According to the report, this shift marks a move away from the original purpose of promoting access to justice.
“Law firms are increasingly using third-party litigation funding to pay to pursue claims that would likely not be pursued otherwise,” said Liam McGuinty, Vice President of Strategy at IBC.
At its core, third-party litigation funding allows external investors in Canada, often hedge funds or private equity firms to finance legal claims in exchange for a portion of any settlement or judgment. While this practice began with good intentions, Dentons highlights that it’s now being used more to generate profits than to support underfunded litigants.
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Lack of Regulation Sparks Concerns
One of the most pressing issues Dentons uncovered is the lack of regulation surrounding litigation funding in Canada. Unlike traditional financial services, legal funding operates in a regulatory grey area. This has raised concerns among insurers and legal experts alike.
As litigation funders become more active, their influence could drive up the cost of legal claims. This will ultimately impact the property and casualty insurance rates. When more lawsuits are filed, especially large class actions, insurers often face higher claim payouts. This can lead to a premium increase for both individuals and businesses.
Lessons from the U.S. Legal Landscape
Dentons draws a clear comparison between trends in Canada and the litigation climate in the United States. In the U.S., the Chamber of Commerce estimates that the total cost of litigation equates to about 2.1% of GDP. This is roughly $4,207 per household.
Although Canada hasn’t yet reached those levels, it is following similar patterns. Notably, there’s been a surge in class action lawsuits and a rise in legal advertising campaigns that encourage people to file claims.
“The legal system plays an important role in resolving disputes, but inefficiencies and a lack of oversight can create opportunities for financial exploitation,” McGuinty said.
Impact on Insurance and Class Actions
The report warns that this rise in third-party-backed litigation may significantly affect the structure and pricing of insurance policies. As more claims are filed—often with strong financial backing—insurers are forced to allocate more resources to legal defense and settlements. This drives up loss ratios and can result in higher insurance premiums for consumers and commercial clients alike.
In particular, class actions have seen notable growth in Canada. Dentons attributes this trend to aggressive legal marketing and the availability of external funding. This removes financial risk for plaintiffs and their law firms.
Calls for Regulatory Reform
Given the rapid evolution of the litigation funding model, Dentons is urging policymakers in Canada to consider new regulations. The firm recommends placing limits on how and when third-party funding can be used, especially in cases where profit, rather than justice, is the primary motivation.
Additionally, Dentons suggests that disclosure requirements should be introduced. This would ensure that courts and defendants are aware of any financial backers behind a lawsuit. This will encourage greater transparency in legal proceedings.
The report emphasizes that “regulatory amendments are necessary to address the evolving function of litigation funding.”
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What This Means for the Future of Insurance in Canada
The growth of litigation funding has clear implications for the commercial insurance industry. If left unchecked, this trend could lead to a more litigious environment. When it happens, insurers will face the rising legal costs and an unpredictable risk landscape.
However, with the right policy interventions, Canada has the opportunity to balance access to justice with financial accountability. By establishing a legal framework for litigation funding, regulators can protect both consumers and insurers from systemic risks.
As the conversation around litigation funding continues, industry stakeholders will need to stay informed and proactive. Insurers, law firms, and policymakers must work together to develop clear guidelines that support fair legal practices without compromising the integrity of the insurance system.
