Groundbreaking research project by Demotech uncovered systemic, tech-driven lawsuit practices that are destabilizing U.S. insurance markets.

Protections Proposed by U.S. Senator Thom Tillis and U.S. Rep. Kevin Hern

COLUMBUS, Ohio, Nov. 12, 2025 /PRNewswire/ -- With the rise of AI capabilities, including tech-driven search engines, scam emails, and data scraping, property owners in communities ravaged by storms and natural disasters are consistently suffering a second wave of impact, as "tech-enabled litigation instigation," a predatory, covert business model that has been operating since around 2017, continues to flourish. In addition to deceptive phishing and misdirection practices, third-party litigation funding has emerged as a business model – a practice which has essentially jumped the normal insurance claims process, and dumps policyholders directly into a "litigation" track – often without an understanding that they had bypassed their insurance company's normal claims process. Not only has this process penalized property and homeowners by misdirecting them to a settlement process that includes large payouts to law firms, the large volume of "nuclear verdicts" have resulted in the collapse of insurance companies willing to insurance properties in risk-prone areas. The explosive growth in these tech-driven practices is creating a trail of financial destruction – as well as unresolved damage – in vulnerable communities nationwide.

As documented in the companion report issued November 11, 2025, by Demotech, www.demotech.com\pdfs\papers\demotech_research_project.pdf, the covert, opportunistic model utilizes online tactics, including search engine optimization and pay-per-click advertising, to transition claims into contested or litigated status – a practice that has significant and negative impact on the insurance industry, leading to insurer insolvencies and altered industry claim settlement patterns. The transitioning causes claims to take longer to settle as it also increases the number of claims closed without payment, a direct result of the economic scaling inherent in the capability of the multiple litigation platforms in use.

The current and future financial implications associated with these practices and this business model are substantial, as the success of this business model has attracted billions in third-party litigation funding and influenced the legal profession to implement and consider changes to professional conduct rule regarding non-lawyer involvement in law firms.

The success of the business model has led the Association of Professional Responsibility Lawyers (APRL) to call for changes to rules addressing the involvement of non-lawyers in legal delivery systems – a practice now permitted in jurisdictions including Utah, Arizona, and the District of Columbia, which amended their rules to permit non-lawyers to own interests in law firms or hold positions of responsibility.

To help stave off meteoric growth in an unchecked pipeline of tech-enabled litigated claims, elongated payment patterns and inflated payouts, U.S. Senator Thom Tillis (R-NC) and U.S. Representative Kevin Hern (R-OK) have developed a proposal to impose a federal tax on the profits from third-party litigation funding, thus reducing the attractiveness of litigation by taxing profits, rather than exempting some litigation financing profits. The proposals also seek to reduce the attractiveness of investing in civil litigation, address the influx of funding, and mitigate other issues, including conflicts of interest, foreign investment, frivolous litigation, and predatory practices.

Joe Petrelli, President of Demotech, Inc., developed the original research that uncovered this business model, and his more recent analysis summarized associated industry impacts. Executed by Todd Kozikowski, President and CEO, 4WARN, Inc., Demotech's project unearthed evidence of widespread cyber-enabled, online targeting and attacks on insurance companies.

According to Petrelli, "These coordinated, high-tech scam and email attacks exploit post-storm confusion, capitalize on consumer crises, and accelerate carrier litigation to unsustainable levels. Alarmingly, it is not just homeowners who are being victimized – it is the entire insurance industry and the U.S. transportation economy – industries which serve as a critical safety net for property owners and business stability nationwide – that are subjected to an online, covert business model built on systematic online instigation to secure contested or litigated claims." Continued Petrelli, "In one recent time period in Florida, a group of carriers that failed had a 3% market share of premiums, yet saw their market share of new, annual litigated claims grow to nearly 20%. I knew that this phenomenon of meteoric growth in new, annual litigated claims was caused by 'something new,' a realization that led to this groundbreaking research project, and Todd's discoveries." 

Key research findings include:

• Tech-Enabled Litigation Instigation: A Business Model That Can Destroy Carriers Through Industrial Scale Litigation. For over a decade, "nuclear verdicts" and "social inflation" were identified as causes of insurance availability and affordability crisis. Demotech's research project uncovered a covert business model called "tech-enabled litigation instigation," which has been active since approximately 2017. This model uses search engine optimization, pay-per-click advertising, and other online tactics, supplemented by litigation marketing and platforms, to transition claims to contested or litigated status. This business model has led to several insurer insolvencies, particularly for Florida-focused property insurance writers. It can destroy carriers through industrial-scale litigation by exploiting weaknesses in coverage or policy provisions at a technological level never seen. A State of Florida Office of Insurance Regulation study has estimated the cost of a litigated property insurance claim to be 360% higher than the cost of a non-litigated claim of the same peril.
  
  
• Claim Transitioning and Settlement Patterns: The business model has transformed claim settlement patterns, leading to drawn out settlement times and an increase in claims closed without payment as the cost of filing has been dramatically reduced by litigation platforms. This pattern suggests that claim departments are expending resources on claims that are economical to file but ultimately close without payment, delaying the settlement of more difficult, meritorious claims.
  
  
• Attraction of Investment Community: The success and lucrative nature of this business model has attracted tens of billions of dollars in third-party litigation funding. Of note, the model has also gained significant attention from the investment community, due to its disruptive impact on the insurance and transportation industries. In addition to devasting certain insurers, the business model has led to the downfall of numerous transportation companies; i.e., Yellow Freight, Davies Transportation, Carroll Fulmer, Celadon, NationWide, Preston, Transcon, Jevic, and Arrow, while possessing the ability to change claims settlement patterns in an insurance industry with over two trillion dollars in assets.
  
  
• Transformation of the Legal Profession. The emergence of online technology as a driver of an inflated number of litigated claims has encouraged some within the legal profession to seek amendments to existing rules of professional conduct to allow non-lawyers to invest in, own, or coordinate law firm marketing activities. The model attracts third-party litigation funding, which has become a popular and high-yield asset class, according to Bloomberg. Alarmingly, efforts to require disclosure of third-party litigation funding have often resulted in new contract structures that circumvent the disclosure requirements legislated into place.

Demotech's original research initiative, developed by Joe Petrelli and undertaken by Todd Kozikowski, revealed an entrenched, powerful, multi-faceted, and lucrative business model attracting tens of billions of dollars of litigation funding. To control the ultimate cost of coverage for consumers, while ensuring insurer stability, litigation reform is a necessity – addressing opportunistic litigation practices by enacting the legislation proposed by Sen. Tillis and Rep. Hern is vital, however, it is urgent that consumers, agents, storm recovery leaders, and regulators work together to unmask, identify, and address these practices. Above all, policyholders experiencing damage should be urged to contact their agent or carrier directly to discuss or report a claim, rather than "clicking a link" in a popup ad or unsolicited email.

About Demotech, Inc.

Established in 1985, Demotech, Inc. is a financial analysis firm located in Columbus, Ohio. Demotech has served the insurance industry by providing objective and independent Financial Stability Ratings® (FSRs) for Property & Casualty insurance companies, Life & Health insurance companies, and Title underwriters, among others. As the first company to have its rating process formally reviewed and accepted by Fannie Mae, Freddie Mac, and HUD, Demotech has been leveling the playing field by offering FSRs to insurers of all sizes. As of July 11, 2022, Demotech is registered with the U.S. Securities and Exchange Commission (SEC) as a nationally recognized statistical rating organization (NRSRO) in the class of ratings for insurance companies. Visit www.demotech.com (614) 761-8602 for additional information.

SOURCE Demotech, Inc.