Consumer Legal Funding and Social Inflation: Clearing the Misconceptions
The following was contributed by Eric K. Schuller, President, The Alliance for Responsible Consumer Legal Funding (ARC).
Over the past decade, insurance companies, tort reform advocates, and certain think tanks have increasingly pointed to “social inflation” as a driving force behind higher insurance premiums and larger jury awards. Let’s be clear “social inflation” is not a formally a defined economic concept; it’s an insurance industry narrative that describes some real legal and cultural trends The term itself is elastic, meant to describe cultural, legal, and economic shifts that allegedly lead to outsized liability costs. Critics have attempted to lump Consumer Legal Funding (CLF) into this category, claiming that it somehow fuels runaway verdicts and higher settlement values.
But such claims are deeply flawed. Consumer Legal Funding is fundamentally distinct from litigation financing or any mechanism that could impact the cost of litigation or influence the size of awards. CLF does not bankroll attorneys, experts, or trial strategies; rather, it provides modest, non-recourse financial assistance to injured individuals so they can pay rent, keep the lights on, and buy groceries while their legal claims move through an often slow and complex justice system.
Consumer Legal Funding has nothing to do with social inflation by exploring the mechanics of CLF, unpacking the definition of social inflation, analyzing the evidence, and dismantling the arguments insurers use to conflate the two.
Understanding Social Inflation
“Social inflation” is a term widely used in the insurance industry but often poorly defined. Broadly, it refers to increases in insurance claims costs beyond what can be explained by general economic inflation. Insurers believe it is due to several factors, including:
- Expanding liability concepts – Courts and legislatures allowing broader recovery for damages.
- Plaintiff-friendly juries – Larger awards due to shifting attitudes toward corporations and insurers.
- Aggressive plaintiff bar strategies – Creative legal theories, demand of damages at high levels.
- Erosion of tort reform – Judicial rulings striking down statutory caps or limits.
While these elements may influence claims costs, they have little to do with the day-to-day survival assistance provided through Consumer Legal Funding. CLF is not part of the litigation itself—it is part of the consumer’s household economy.
What Consumer Legal Funding Actually Is
Consumer Legal Funding is a simple, consumer-focused financial product:
- Non-recourse funds – The consumer receives a small amount of financial assistance (average $3,000–$5,000) against the potential proceeds of their legal claim. If they lose the case, they have no further obligation.
- Restricted use – The funds cannot be used to pay legal fees or litigation costs. They are meant for everyday living expenses such as rent, medical co-pays, utilities, and food.
- Separate from litigation – Attorneys remain fully in charge of legal strategy, and courts determine the value of the case without reference to whether a consumer has received CLF.
- Statutory protections – In states where CLF is regulated, statutes explicitly prohibit the funds from being used to finance litigation.
In essence, CLF is about financing life, not litigation it ensures that injured consumers are not put into a “forced settlement” simply because they cannot afford to wait for fair compensation.
The False Link Between CLF and Social Inflation
Opponents of CLF often argue that providing consumers with financial breathing room allows them to hold out for larger settlements, thereby inflating claims costs. This narrative is problematic for several reasons:
- Settlements are driven by case value, not desperation.
Settlement negotiations are based on liability facts, damages evidence, and the likelihood of success at trial. A consumer’s ability to pay rent has no bearing on whether a defendant is legally liable for an injury. - CLF levels the playing field, not tips it.
Insurers routinely exploit financial desperation to force low-ball settlements. CLF prevents this imbalance but does not artificially inflate case value, it simply ensures consumers can wait for the fair value of their settlement and not a forced settlement. - No evidence connects CLF to higher verdicts or insurance premiums.
Despite repeated assertions, insurers have not produced empirical studies demonstrating that states with regulated CLF experience higher claim costs or premium growth compared to states without it. - Average funding amounts are too small to affect case economics.
With fundings averaging just a few thousand dollars, it cannot influence the outcome of the litigation.
Social Inflation Drivers: CLF Isn’t One of Them
To further dismantle the narrative, it is important to examine what is thought to be the drivers of “social inflation” and show where CLF stands in relation.
1. Jury Attitudes and “Nuclear Verdicts”
Juries may award higher damages due to distrust of corporations or outrage over egregious conduct. These cultural and psychological factors are wholly unrelated to whether a consumer had help paying rent while waiting for trial.
2. Expanding Damages Categories
Courts and legislatures increasingly allow recovery for noneconomic damage or broaden definitions of liability. CLF has no influence over judicial doctrine or statutory reform.
3. Litigation Tactics
CLF contracts explicitly bar funding companies from interfering in legal strategy.
By every measure, CLF is not a driver of social inflation but a consumer protection tool.
Evidence From Regulated States
Roughly a dozen states—including Ohio, Nebraska, Oklahoma, Utah, and Vermont—have enacted statutes regulating Consumer Legal Funding. These states continue to have competitive insurance markets, and there is no evidence of outsized premium growth attributable to CLF.
If CLF were truly a driver of so-called social inflation, one would expect observable differences in these states’ insurance markets compared to others. None exists.
Insurer Motivations for Blaming CLF
Why, then, do insurers persist in linking CLF to social inflation? Several strategic motivations are at play:
- Deflection from internal cost drivers.
Insurers face rising costs due to investment losses, catastrophic weather events, and corporate overhead. Blaming “social inflation” provides a convenient external scapegoat. - Preservation of settlement leverage.
Low-ball settlements save insurers billions annually. CLF disrupts this model by giving consumers the financial means to reject unfair offers. - Regulatory advantage.
By conflating CLF with commercial litigation finance, insurers push for broad disclosure and restrictions that would make CLF less accessible, thereby tilting the field back in their favor.
In short, attacks on CLF are less about economics and more about control of the settlement process.
Consumer Stories: The Human Impact
Behind every policy debate are real people. Consider these examples:
- Maria, a single mother in Ohio, suffered a serious injury in a car accident. While her case moved through litigation, she was unable to work. A $3,000 funding allowed her to pay rent and avoid eviction. Her case later settled for fair value based on her medical damages, not because she received CLF.
- James, a factory worker in Tennessee, used a $4,500 funding to cover medical co-pays and keep food on the table for his family. Without CLF, he would have been pressured to accept an early, inadequate settlement. His attorney, free from outside interference, negotiated based on case facts.
These stories illustrate that CLF prevents forced settlements, a concept fundamentally at odds with the idea of social inflation.
Reframing the Debate: CLF as a Consumer Protection Tool
Instead of vilifying CLF, policymakers and regulators should recognize it as a consumer protection mechanism that:
- Preserves access to justice by ensuring consumers can sustain themselves while cases proceed.
- Protects vulnerable populations from financial exploitation by insurers.
- Operates transparently under statutory frameworks that prohibit interference with litigation.
- Provides an alternative to payday loans or credit card debt.
By reframing CLF in this way, legislators can see that it is part of the solution to financial inequity in the justice system, not a contributor to systemic cost drivers like “social inflation”.
Conclusion
The narrative that Consumer Legal Funding contributes to social inflation is unsupported by evidence, inconsistent with the mechanics of the product, and misleading its intent. CLF does not increase jury awards, expand liability doctrines, or drive insurance premiums. Instead, it provides a lifeline for consumers caught in the limbo of pending legal claims.
Policymakers should reject the false linkage and recognize Consumer Legal Funding for what it is: a narrow, humane financial product that has nothing to do with so called “social inflation”, but everything to do with justice and survival.
