Litigation funding is designed to improve access to justice by enabling plaintiffs who may lack the resources to pursue legal claims. However, as this industry grows with limited regulation in Canada, insurers worry it could fuel an increase in claims that might not otherwise have been pursued. Investors, seeking high returns, are backing more lawsuits—sometimes on a speculative basis—potentially encouraging more aggressive litigation strategies.
The Dentons report points out that this shift could lead to “social inflation,” a phenomenon where legal costs, settlements, and jury awards rise faster than general inflation. Social inflation has already impacted the U.S. insurance market and now threatens to escalate costs in Canada. Insurers warn that this upward pressure on claims costs could translate into higher premiums for consumers and businesses.
“The involvement of third-party funders changes the dynamics of litigation,” said a spokesperson for the Insurance Bureau of Canada. “It creates incentives for more claims and prolonged legal battles, which ultimately raise costs for insurers and policyholders.”
While litigation funding can help level the playing field, especially for smaller plaintiffs against large corporations, the insurance sector argues that the current pace and scale of growth are unsustainable without clear regulatory oversight.
Currently, Canada has no comprehensive framework regulating litigation funding. Courts have addressed the issue in various rulings, but there remains uncertainty and inconsistency across provinces. This lack of regulation contrasts with jurisdictions like Australia and the United Kingdom, where oversight is more established.
The Insurance Bureau of Canada is calling for closer scrutiny and regulation of the litigation funding industry to protect the stability of the insurance market and prevent unchecked legal costs from burdening Canadians.
Industry experts also warn that insurers may have to adjust policy terms, premiums, and reserves to cope with the rising exposure to litigation funded by third parties. Some insurers have already reported a rise in claims linked to funded lawsuits.
