Better Demotech Article

DEMOTECH: SYSTEMIC TECH-DRIVEN LAWSUIT PRACTICES DESTABILIZE U.S. INSURANCE MARKETS

A new and rapidly expanding threat is undermining the stability of U.S. insurance markets: tech-enabled litigation instigation. Since about 2017, AI-driven search manipulation, phishing emails, data scraping, and automated outreach have redirected storm-affected property owners into litigation pathways—often without any awareness that they bypassed their insurer’s normal claim process. This covert model has produced inflated legal fees, higher litigation rates, unresolved property damage, and even the collapse of insurers in high-risk regions. The result is a second wave of harm that hits communities long after the storm has passed.

Demotech’s November 11, 2025, companion report (https://www.demotech.com/pdfs/papers/demotech_research_project.pdf) details how online tactics—SEO, pay-per-click ads, and digital lead funnels—systematically convert routine claims into contested or litigated cases. These methods delay settlements, drive up claims closed without payment, and overwhelm claim departments with low-merit filings.

Florida’s Office of Insurance Regulation estimated that litigated claims cost 360% more than non-litigated ones, illustrating the extraordinary economic strain created when litigation is triggered at scale. In one Florida sample, carriers with just 3% market share experienced nearly 20% of new litigated claims—an early indicator of the industrialized nature of this model.

Fueling this escalation is the surge of third-party litigation funding, now a multi-billion-dollar investment class. We learned at a recent Utica National E&O insurance training event that estimated third-party litigation funding is a $17 billion industry with direct costs to the insurance industry approaching $25 billion. Add in indirect costs and it could have an economic impact of $50 billion with a return on investment of 27% to 77% for litigation funding investment portfolios.

Utica National expects the cost of third-party litigation funding to increase by 75-100 percent, in the next five years. With such strong returns, litigation financing has drawn strong interest from private equity and global investors, prompting discussions across the legal industry about loosening professional conduct rules.

The Association of Professional Responsibility Lawyers (APRL) has urged the profession to consider changes. Several jurisdictions—Utah, Arizona, and Washington, D.C.—now permit non-lawyers to own stakes or hold operational roles in law firms. Meanwhile, efforts to require disclosure of litigation funders have been sidestepped through contract structures designed to evade transparency requirements.

In response to these mounting risks, U.S. Senator Thom Tillis (R-NC) and U.S. Representative Kevin Hern (R-OK) have introduced a proposal to impose a federal tax on profits from third-party litigation funding. Their goal is to reduce the financial incentives that make mass-scale litigation profitable, curb the influx of speculative investment capital, and mitigate concerns such as foreign influence, frivolous filings, and predatory digital targeting. By taxing profits rather than exempting them, the proposal aims to rebalance the system and protect consumers, insurers, and transportation companies already destabilized by widespread litigation funding.

Demotech President Joe Petrelli and 4WARN, Inc. CEO Todd Kozikowski led the research that exposed the breadth and sophistication of this business model, uncovering evidence of coordinated cyber-enabled campaigns targeting insurers and confused policyholders. Their findings highlight the urgent need for consumer education, agent awareness, and regulatory reform.

Above all, property owners should be strongly encouraged to contact their carrier or agent directly when they experience storm damage—rather than clicking links in pop-ups, ads, or unsolicited emails that may quietly route them into costly litigation schemes.