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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

Consumer

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Consumer

New York Enacts Consumer Litigation Funding Act Impacting Litigation Finance

By John Freund |

New York has enacted a new Consumer Litigation Funding Act, establishing a formal regulatory framework for third party litigation funding transactions involving consumers. The law, signed by Governor Kathy Hochul in December, introduces new registration requirements, disclosure obligations, and pricing restrictions aimed at increasing transparency and limiting costs for funded claimants.

As reported in Be Insure, litigation funders must register with the state and comply with detailed consumer protection rules. Funding agreements are required to clearly disclose the amount advanced, all fees and charges, and the total amount that may be owed if the case is successful.

Consumers must initial each page of the agreement and are granted a ten day cooling off period during which they may cancel the transaction without penalty. The law also prohibits funders from directing litigation strategy or interfering with the professional judgment of attorneys, preserving claimant and counsel independence.

One of the most significant provisions is a cap on the total charges a funder may collect, which is limited to 25 percent of the gross recovery. Prepayment penalties are unenforceable, and attorneys representing funded plaintiffs are prohibited from holding a financial interest in a litigation funding company. For the first time, consumer litigation funding in New York is brought under the state’s General Business Law, replacing years of relatively limited oversight with a comprehensive statutory regime.

Supporters of the legislation argue that the law addresses concerns about excessive costs and abusive practices while providing clarity for an industry that has operated in a regulatory gray area. Industry critics, however, have raised questions about whether pricing caps could restrict access to funding for higher risk claims.

Consumer

New York Enacts Landmark Consumer Legal Funding Legislation

By Eric Schuller |

The Alliance for Responsible Consumer Legal Funding (ARC) applauds New York Governor Kathy Hochul for signing into law Assembly Bill 804C/Senate Bill 1104, a landmark measure establishing thoughtful regulation for Consumer Legal Funding in the Empire State.

Sponsored by Assemblymember William B. Magnarelli and Senator Jeremy Cooney, this legislation creates a clear framework that protects consumers while preserving access to a vital financial resource that helps individuals cover essential living expenses—such as rent, mortgage, and utilities, while their legal claims are pending.

“I am pleased that the Governor signed this important bill into law today.  It is the culmination of 8-years of hard work on this issue.  This law will provide a sound framework to regulate financing agreements and provide protections to consumers.  I want to thank the Alliance for Responsible Consumer Legal Funding and its President, Eric K. Schuller for working with me to get this bill over the finish line.  I would also like to thank and acknowledge my late colleague, Assemblyman Michael Simanowitz, who was the original sponsor of this legislation.”  -- William B. Magnarelli, 129th Assembly District 

For many New Yorkers, Consumer Legal Funding provides a critical financial lifeline while a legal claim is pending, often for months or years. Injured consumers frequently face lost income and mounting household expenses at the very moment they are least able to manage financial strain. Consumer Legal Funding allows individuals to cover essential living costs, such as rent, utilities, transportation, and groceries, without being forced into an early or unfair settlement simply to make ends meet.

Senator Jeremy Cooney stated: “Today marks a historic step forward in protecting everyday New Yorkers from opaque and often predatory litigation financing practices. For too long, vulnerable plaintiffs have been left in the dark about the true cost of third-party funding, only to see the majority of their hard-earned legal recovery eroded by fees and unclear terms. I'm proud to sponsor this bill that brings transparency, accountability, and basic consumer protections to this industry, ensuring New Yorkers can pursue justice without sacrificing financial security."

Because Consumer Legal Funding is non-recourse, consumers repay funds only if they recover proceeds from their legal claim, if there is no recovery, they owe nothing. This structure protects consumers from taking on debt, preserves their financial stability, and ensures they retain full control over their legal decisions. By enacting this legislation, New York affirms that Consumer Legal Funding supports financial stability and access to justice.

“This law strikes the right balance between consumer protection and financial empowerment, by establishing clear rules of the road, New York ensures that consumers retain freedom of choice, transparency, and access to funds that help them meet their immediate needs during one of the most difficult times in their lives.” said Eric K. Schuller, President of the Alliance for Responsible Consumer Legal Funding (ARC). “We thank Governor Hochul for her leadership and Assemblymember Magnarelli and Senator Cooney for their commitment to fairness and consumer choice. This new law affirms that Consumer Legal Funding is about funding lives, not litigation.” 


Under the new law, Consumer Legal Funding is defined as a non-recourse transaction in which a company purchases a contingent right to receive proceeds from a consumer’s legal claim. The law contains several key consumer safeguards, including:

• Clear Contract Disclosures: All terms, charges, and cumulative repayment amounts must be plainly stated and initialed by the consumer.
• Right to Cancel: Consumers have ten business days to cancel a contract without penalty.
• Attorney Oversight: Attorneys must acknowledge reviewing mandatory disclosures and are prohibited from accepting referral fees or having a financial interest in funding companies.
• Prohibited Practices: Funding companies may not influence settlement decisions, mislead consumers through advertising, or refer clients to specific attorneys or medical providers.
• Registration and Reporting: All funding companies must register with the State of New York and file annual reports, and meet bonding and disclosure requirements.

The act takes effect 180 days after becoming law and marks another milestone in advancing consumer protection and responsible business practices across the nation.

About ARC

The Alliance for Responsible Consumer Legal Funding (ARC) is the national trade association representing companies that provide Consumer Legal Funding—non-recourse financial assistance that helps consumers meet everyday living expenses while their legal claims proceed. ARC advocates for policies that protect consumers and ensure access to fair, transparent, and responsible funding options.

Consumer

ARC Defends Consumer Legal Funding as Free Market Financial Tool

By John Freund |

A recent article in the National Law Review by Eric K. Schuller offers a strong endorsement of Consumer Legal Funding (CLF) as a market-driven solution to the financial challenges faced by individuals pursuing legal claims. Schuller, who serves as President of the Alliance for Responsible Consumer Legal Funding (ARC), presents CLF as a voluntary, non-coercive financial tool that allows consumers to maintain stability and independence while waiting for their legal cases to resolve.

In the article, Schuller argues that CLF enables consumers to access much-needed funds on their own terms, without government mandates or subsidies. The availability of CLF helps consumers avoid settling their claims prematurely out of financial desperation. Instead, it gives them the breathing room to hold out for fair outcomes. Schuller emphasizes that the funding process is entirely optional, typically involves attorney consultation, and occurs in a competitive marketplace that encourages innovation in pricing, transparency, and service.

Schuller outlines three key benefits of CLF. First, it helps individuals resist lowball settlement offers by reducing financial pressure. Second, it provides support for essential living expenses such as rent, groceries, and utilities while legal proceedings continue. Third, it preserves consumer autonomy by allowing recipients to use the funds as they see fit, unlike government programs that often come with use restrictions.

The article also makes the case that CLF is faster and more accessible than public assistance programs, which often involve delays and eligibility hurdles. Schuller notes that in states with existing CLF regulations, laws already prohibit funders from influencing legal strategy or interfering with the attorney-client relationship, reinforcing the consumer-focused nature of the product.

He pushes back against critics who claim that CLF inflates litigation costs or interferes with the legal process. Instead, Schuller frames CLF as a form of personal finance, not litigation financing, and stresses that it is provided at no cost to taxpayers.