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Consumer Legal Funding and Social Inflation: Clearing the Misconceptions

By Eric Schuller |
September 11, 2025

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:

  1. Expanding liability concepts – Courts and legislatures allowing broader recovery for damages.
  2. Plaintiff-friendly juries – Larger awards due to shifting attitudes toward corporations and insurers.
  3. Aggressive plaintiff bar strategies – Creative legal theories, demand of damages at high levels.
  4. 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:

  1. 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.
  2. 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. 
  3. 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.
  4. 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:

  1. 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.
  2. 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.
  3. 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.

About the author

Eric Schuller

Eric Schuller

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Consumer

What Happens to Consumers When Consumer Legal Funding Disappears

By Eric Schuller |

The following was contributed by Eric K. Schuller, President, The Alliance for Responsible Consumer Legal Funding (ARC).

The Real-World Consequences of Over-Regulation and Misclassification

State lawmakers across the country are increasingly focused on how to regulate third-party financial activity connected to litigation. That attention is appropriate and necessary. However, when Consumer Legal Funding (CLF) is misclassified as a loan, conflicted with commercial litigation finance, or subjected to regulatory structures designed for fundamentally different financial products, the consequences fall not on providers, but on consumers who need it the most.

Consumer Legal Funding, Funding Lives, Not Litigation, exists to help individuals with pending legal claims meet basic household needs while their cases move through the legal system. These consumers are often recovering from serious injuries, unable to work, and facing mounting financial pressure. When CLF disappears due to over-regulation or misclassification, those consumers do not suddenly become financially secure. Instead, they are pushed into worse, more dangerous alternatives, or forced into decisions that undermine both their legal rights and their long-term financial stability.

Who Uses Consumer Legal Funding and Why

Consumers who turn to CLF are not seeking to finance their litigation. They are seeking financial stability. On average, CLF transactions range between $3,000 and $5,000. These monies are used for rent, mortgage payments, utilities, groceries, childcare, transportation, and medical co-pay. In many cases, it is differences between maintaining housing or facing eviction, between keeping a car or losing the ability to get to medical appointments or work.

CLF is non-recourse. If the consumer does not recover in their legal claim, they owe nothing. That structure places all financial risk on the provider, not the consumer. It is precisely this risk allocation that distinguishes CLF from loans and traditional credit products, and it is why courts and legislatures in numerous states have recognized that CLF is not a loan.

When lawmakers impose loan-based frameworks on CLF, including usury caps, amortization requirements, or repayment obligations disconnected from case outcomes, the product becomes economically impossible to offer. The result is not a cheaper product. The result is no product at all.

The Immediate Impact of CLF Disappearing

When CLF exits a state market, the effects are immediate and measurable.

First, consumer access disappears. Providers cannot operate under regulatory structures that ignore the non-recourse nature of the product. Capital exits the market, and consumers lose an option that previously helped them remain financially afloat during litigation.

Second, consumers are forced into inferior alternatives. Without CLF, injured individuals frequently turn to credit cards, payday lenders, installment loans, or borrowing from friends and family. These options often carry guaranteed repayment obligations, compounding interest, collection risk, and damage to credit. Unlike CLF, these products do not adjust based on whether the consumer recovers anything in their legal claim.

Third, financial pressure forces premature settlements. When consumers cannot meet basic living expenses, they are more likely to accept early, undervalued settlements simply to survive. This undermines the fairness of the civil justice system and benefits defendants and insurers, not injured parties or the courts.

Misclassification Harms the Most Vulnerable Consumers

The consumers most harmed by the elimination of CLF are those with the fewest alternatives. These are individuals with limited savings, limited access to traditional credit, and limited ability to absorb income disruption following an injury.

Ironically, regulations intended to protect consumers often end up harming precisely the consumers they sought to help. When CLF is treated as a loan, the regulatory burden drives responsible providers out of the market while doing nothing to improve consumer outcomes. Consumers do not gain safer options. They lose transparent, regulated, non-recourse funding and are pushed toward products with higher risk and fewer protections.

This is not hypothetical. States that have enacted overly restrictive frameworks or applied inappropriate rate caps have seen providers exit, access shrink, and consumer choice vanish. The lesson is clear. When regulation ignores economic reality, consumers pay the price.

CLF Does Not Drive Litigation or Verdict Inflation

A common concern raised in policy debates is whether CLF encourages litigation, prolongs cases, or contributes to so-called nuclear verdicts. The evidence does not support these claims.

CLF is accessed after a legal claim already exists. It does not finance attorneys’ fees, court costs, or litigation strategy. Providers have no control over legal decisions, settlement timing, or trial outcomes. Their only interest is whether a consumer recovers at all.

Moreover, the small size of typical CLF transactions makes it implausible that they influence case strategy or verdict size. A $3,000 to $5,000 transaction used to pay rent or utilities does not drive multi-million-dollar litigation outcomes. Conflating CLF with commercial litigation finance obscures these realities and leads to policy mistakes.

A Better Path Forward for Policymakers

Legislators can protect consumers without eliminating CLF. States that have enacted thoughtful CLF statutes have focused on disclosure, transparency, contract clarity, and consumer choice, rather than imposing loan-based rate structures that do not fit a non-recourse product.

Effective regulation acknowledges three core principles. First, CLF is not a loan and should not be regulated as one. Second, consumers benefit from access to a regulated, transparent product rather than being pushed into worse alternatives. Third, clear rules provide stability for both consumers and providers.

When policymakers get this balance right, consumers retain access to a product that helps them weather one of the most difficult periods of their lives without distorting the justice system or creating unintended harm.

Conclusion

The issue confronting lawmakers is not whether Consumer Legal Funding should be subject to oversight, but whether existing and future frameworks accurately reflect how the product operates and whom it serves. When CLF is swept into regulatory regimes designed for loans or commercial litigation finance, the result is not improved consumer protection. It is the quiet elimination of a non-recourse option that many injured consumers rely on to remain financially stable while their legal claims are resolved.

Careful, informed policymaking requires recognizing that Consumer Legal Funding is distinct, limited in size, non-recourse, and consumer-facing. Regulation that acknowledges those characteristics preserves transparency and accountability without stripping consumers of choice or forcing them into riskier financial alternatives. When rules are tailored to economic reality rather than broad assumptions, consumers are better protected, markets remain stable, and the civil justice system functions as intended.

Consumer

Consumer Legal Funding Is Not a Loan, Courts and Economists Agree

By John Freund |

The debate over whether consumer legal funding should be classified as a loan continues to surface in regulatory and policy circles, but legal doctrine and economic analysis consistently point in the opposite direction. Consumer legal funding is a non-recourse financial transaction tied to the outcome of a legal claim. If the consumer does not recover in their case, they owe nothing. This defining feature alone places the product outside the traditional boundaries of consumer lending, which requires repayment regardless of outcome and typically involves credit underwriting, collateral, and enforceable debt obligations.

An article in the National Law Review explains that courts and legislatures across the United States have repeatedly recognized this distinction. Rather than viewing consumer legal funding as borrowed money, courts have treated these arrangements as the purchase of a contingent interest in a future settlement or judgment. Because repayment is entirely dependent on case success, judges have found that the economic substance of the transaction does not resemble a loan, nor does it fit neatly within existing consumer credit frameworks.

Judicial decisions from multiple jurisdictions underscore this point. Courts have emphasized that consumers face no personal liability, no collection efforts, and no obligation to repay from their own assets. These factors are incompatible with the legal definition of a loan, which presumes a fixed obligation to repay principal and interest. As a result, attempts to recharacterize consumer legal funding as lending have largely failed when scrutinized under established legal standards.

From an economic perspective, consumer legal funding plays a distinct role in the civil justice system. It provides liquidity to plaintiffs who may be facing prolonged litigation and financial pressure, often helping them avoid accepting premature or undervalued settlements. Treating these transactions as loans could impose regulatory requirements that are poorly suited to non-recourse funding and risk limiting consumer access to a product designed to mitigate imbalance between individual plaintiffs and well-resourced defendants.

Consumer

Legal-Bay Hails New York Litigation Funding Act as Industry Milestone

By John Freund |

Legal Bay has praised New York Governor Kathy Hochul for signing the New York Litigation Funding Act into law, describing the legislation as a landmark step that finally provides a clear regulatory framework for consumer litigation funding in the state. The new law represents a significant development for an industry that has operated for years amid legal uncertainty in one of the country’s most active litigation markets.

A Legal Bay press release notes that the legislation establishes a comprehensive set of consumer protections and regulatory standards governing litigation funding transactions in New York. Legal Bay characterized the law as the product of more than two decades of policy development and sustained advocacy efforts by industry participants and consumer access to justice groups. The company emphasized that the statute provides long needed clarity by formally recognizing consumer litigation funding as a non recourse financial transaction rather than a traditional loan.

Under the new framework, funded plaintiffs are only required to repay advances if they obtain a recovery in their legal claims. Supporters of the law argue that this distinction is critical in protecting consumers from additional financial risk while ensuring that individuals with meritorious claims are able to cover basic living expenses during the often lengthy litigation process. Legal Bay highlighted that litigation funding can help plaintiffs avoid accepting early settlements driven by financial pressure rather than the merits of their cases.

Legal Bay also acknowledged the role played by New York lawmakers in advancing the legislation through the state legislature, noting that the law strikes a balance between consumer protection and preserving access to funding. According to the company, the statute promotes transparency, fairness, and stability in a market that continues to grow in both size and sophistication.