North Carolina Becomes First US State to Enact Outright Ban on Litigation Financing

North Carolina has taken a landmark step in the national debate over litigation financing, becoming the first US state to enact an outright ban on the practice. Under the new law, it is now unlawful for a person or entity to engage in litigation investment in the state — meaning third-party investors can no longer fund lawsuits in exchange for a share of any settlement or judgment award.

Third-party litigation funding has grown into a multi-billion-dollar industry in which outside investors, including hedge funds and specialized financiers, provide capital to plaintiffs or law firms to pursue litigation in return for a portion of the proceeds if the case succeeds. Proponents argue it expands access to justice by enabling individuals and smaller parties to pursue meritorious claims they otherwise could not afford. Critics, particularly in the insurance industry, contend that it incentivizes excessive and prolonged litigation, inflates settlement demands, and ultimately drives up costs that are passed on to consumers through higher insurance premiums.

The insurance industry has increasingly identified litigation funding as a major contributor to 'social inflation' or 'legal system abuse' — the rising cost of insurance claims driven by factors beyond economic inflation, including larger jury awards, aggressive plaintiff tactics, and expanded liability theories. This concern was prominently flagged in the recent Triple-I and Munich Re RiskScan 2026 study, which identified growing recognition of legal system abuse as a key driver of rising property-casualty insurance costs. States such as Florida and Louisiana have been particularly affected by litigation-driven loss trends.

North Carolina's outright ban goes further than the disclosure and regulation requirements that several other states have considered or adopted. The move is likely to be closely watched by other state legislatures, insurers, the legal industry, and the litigation funding sector itself, as it could set a precedent for a broader regulatory backlash. For insurers operating in North Carolina, the ban could help moderate claims cost pressures over time, though the practical effects will unfold gradually as the legal landscape adjusts.