North Carolina Becomes First US State to Ban Third-Party Litigation Funding

In a landmark legislative move closely watched by the insurance industry nationwide, North Carolina has become the first US state to enact a comprehensive ban on third-party litigation funding (TPLF). Governor Josh Stein signed House Bill 315 — now Session Law 2026-14, titled the 'Prohibit Litigation Investments Act' — on June 22, 2026, and it took effect immediately for civil proceedings commenced on or after that date and for funding contracts entered into, renewed, or amended on or after that date.

Third-party litigation funding refers to arrangements where outside investors, such as hedge funds, provide capital to plaintiffs or law firms to cover legal costs in exchange for a share of any settlement or judgment. The new law makes it unlawful to engage in or furnish litigation investment in the state, defining 'litigation investment' broadly to cover direct payments, advances, loans, and investments tied to the outcome of a civil proceeding. Violators face civil penalties of up to $50,000 per violation, and injured parties may recover treble damages. The bill passed with overwhelming support — 112-0 in the House and 45-1 in the Senate.

The law includes important carve-outs: it does not affect traditional contingency-fee arrangements, an insurer's contractual obligation to defend or indemnify policyholders, nonprofit and legal-aid funding, financial support from immediate family members, or direct loans whose repayment is not contingent on a case's outcome.

Insurance industry groups have strongly welcomed the legislation. The American Property Casualty Insurance Association (APCIA) and the Insurance Information Institute (Triple-I) have long argued that TPLF is a significant driver of 'legal system abuse,' escalating litigation, prolonging disputes, and increasing settlement costs that ultimately raise insurance premiums for consumers and businesses. Triple-I's Mark Friedlander said the action sends a clear message that 'the civil justice system is not an investment vehicle.' Critics, including litigation finance firms and some plaintiffs' attorneys, counter that the practice expands access to justice for claimants who cannot otherwise afford to take on well-funded defendants, and warn a full ban could shut ordinary claimants out of complex cases.

North Carolina's outright ban goes further than measures in other states, which have generally focused on disclosure requirements, funder registration, recovery caps, or bars on foreign-backed financing. At least 11 states have enacted some form of restriction, and lawmakers in California, Colorado, and Illinois are weighing their own measures. A federal bill, the Litigation Funding Transparency Act, remains pending before the Senate Judiciary Committee.