What's Happening?
California Governor Gavin Newsom signed Assembly Bill 2305 into law on September 20, 2026, targeting the influence of corporate legal funders on litigation decisions. This legislation, effective for contracts entered into on or after January 1, 2027,
restricts private equity firms, hedge funds, and other capital providers from controlling or improperly influencing substantive litigation decisions. The law specifically prohibits funders from interfering with client representation, litigation strategy, settlement decisions, funding choices, and the selection or management of legal counsel. While AB 2305 does not ban nonrecourse litigation finance entirely, it establishes clear boundaries to prevent funders from engaging in what could be considered the unauthorized practice of law. Violations can lead to State Bar discipline for attorneys and civil remedies for both attorneys and corporate legal funders, including statutory damages of $10,000 per violation or three times actual damages, whichever is greater.
Why It's Important?
AB 2305 is a significant development in the ongoing national debate surrounding third-party litigation funding and its impact on the U.S. legal system and casualty insurance market. Insurers and critics argue that outside capital can prolong litigation, inflate settlement demands, and contribute to rising claim costs, a phenomenon often referred to as 'social inflation.' By focusing on funder control rather than outright prohibition, California aims to mitigate these concerns while still allowing access to legal financing. This law could influence how litigation is financed and managed within California, potentially leading to more transparent and ethically sound practices. For casualty insurers, this legislation is part of a broader trend of state-level efforts to regulate litigation funding, which could affect loss development, reserves, and pricing in the long term. The distinction between financing a case and controlling it is crucial, and California's approach may serve as a model for other states grappling with similar issues.
What's Next?
The implementation of AB 2305 will begin with contracts entered into on or after January 1, 2027. Legal funders, law firms, and plaintiffs in California will need to adjust their practices to comply with the new restrictions on control and influence. This may lead to a restructuring of some funding agreements and a heightened focus on attorney independence in litigation decisions. The impact of AB 2305 on claim severity, settlement demands, and casualty insurance costs will be closely monitored by the insurance industry, though it will take time to gather sufficient data for a comprehensive evaluation. California's approach, alongside similar legislation in states like Illinois, indicates a growing trend of legislative scrutiny over litigation funding. Retail agents and their clients should continue to monitor the evolving legal landscape regarding casualty risks, as state-by-state variations in litigation funding rules could influence venue considerations and long-tail casualty exposure.
