For the past several years, when our industry discussed outside capital in legal services, we’ve been discussing the left side of the “v”: the plaintiff bar. We’ve been talking about the $125 million investment in Rafi Law Group, or Uplift Investors Orion Legal platform that has been consolidating personal injury firms, or Morgan & Morgan’s retaining of JP Morgan to explore a minority stake sale that, according to Reuters, could raise more than $1 billion and lead to a public listing. We’ve been talking about the billions invested in commercial litigation finance over the last decade. Or we’ve been talking about the more than $700 million invested in plaintiff-enabling software platforms like EvenUp, Eve, Supio, or Darrow.
That conversation has changed. In recent weeks, several well-known national insurance defense firms have been reported to be exploring private equity investment, in transactions large enough to draw coverage in the financial press. I am aware of at least 10 more firms involved in similar conversations, and my industry colleagues imply there are many more.
Investments in software and into individual cases are different than investments into law firms directly, and the implications are quite different. This article takes no position on whether that is good or bad for our industry. Instead, this article’s purpose is much narrower: to provide basic education about these mechanisms.
It is important that all claim executives and professionals understand the mechanisms for these investments, as the consequences will reach panel management, defense economics, and the regulatory environment we all work in. It is important to understand it before we have to react to it.
How the Money Gets In
Model Rule 5.4 prohibits nonlawyer ownership of law firms and fee-sharing with nonlawyers, and some version of it is in force in nearly every state. A handful of jurisdictions have created exceptions. Arizona eliminated its Rule 5.4 in 2021 and had licensed 136 alternative business structures as of April 2025. Utah runs a sandbox. The District of Columbia and Puerto Rico permit limited nonlawyer ownership.
Those exceptions have not become a primary pathway because a license in Phoenix does not authorize a lawyer to practice in another state under an arrangement prohibited by that other state. ABA Formal Opinion 91-360 said as much in 1991, and states have reinforced it since.
The model, as it exists today, is this: The practice is divided into two entities. One is the law firm, still owned by lawyers, still holding the client relationships, and still exercising legal judgment. The other is a management services organization (MSO), which holds everything that does not require a bar card, such as marketing, intake, technology, billing, finance, human resources, procurement, and real estate. The investor buys the MSO. The firm contracts with it for services.
Here is where the value comes from. Today, a firm’s partners take home whatever is left after expenses, and that number changes every year. Under the MSO structure, the partners first agree on what each of them will earn going forward, a defined market-rate compensation that stays with the lawyers. The profit above that line, the money that used to be distributed at year-end, becomes the MSO’s earnings instead. That earnings stream is what the investor is actually buying. It gets valued on a multiple, the way any business would be, and the partners are paid for it up front, in cash and in equity in the MSO. The trade will be familiar to anyone who has sold a company: give up an unpredictable annual distribution in exchange for a check today and a stake in what the business becomes.
Borrowed From Medicine
This was a practice that originated in healthcare. Physician practice management has used the same architecture for more than 30 years. Healthcare has a similar and parallel restriction: the corporate practice of medicine doctrine.
The legal model stems from the same division of entities, the same roll-up logic, the same founder liquidity challenge, and the same multiple arbitrage. The people building legal MSOs are quite open that healthcare is the template.
The analogy is instructive in both directions. Physician practices bill identifiable payers at negotiated rates, and renegotiating those rates upward is a central driver of returns in that sector. Insurance defense has no equivalent lever. Rates are largely set by the carrier, and the law firm, not the MSO, remains the party to the engagement. That inversion matters. Where a medical roll-up can grow revenue per unit of work, a defense platform investing with the same logic has to find its return somewhere else. What does change for a carrier may be more subtle: The firm across the table may be operating under a cost structure and a technology roadmap set by an owner the carrier never meets.
What an MSO Cannot Do
At this early juncture in legal MSO development, there appear to be three broadly-agreed-to limits across jurisdictions:
- An MSO cannot direct a lawyer’s professional judgment.
- It cannot take a fee tied to the firm’s legal fees, revenues, or profits.
- It cannot control the client relationship.
Texas Ethics Opinion 706, issued in February 2025, is the anchor on the fee point: Tying an MSO’s compensation to firm revenue is prohibited fee-splitting. Flat and cost-based fees are permitted; percentages are not.
Three states have now moved from ethics opinions to statutes, and they say slightly different things. California’s AB 931 restricts fee-sharing with out-of-state alternative business structures while carving out MSOs that charge a flat fee, pay nothing for referrals or lead generation, and do not scale with recovery. Colorado’s law, effective in August of 2026, permits the MSO and bans the percentage, and adds a private right of action with reach beyond the state line. Illinois has extended this the furthest, prohibiting any fee based “directly or indirectly” on firm revenue, and requiring that a firm party to an MSO agreement disclose that fact, and its terms, in its client contracts.
What remains unsettled is indirect control. A services agreement the firm cannot practically terminate, a security interest across firm assets, an arrangement in which the MSO owns the firm’s brand and licenses it back. None of these transfers ownership, and all of them constrain independence. No regulator has fully answered where that line sits.
What This Means for Claims
At this early juncture the most important takeaway for a claims executive may simply be awareness of the trend so they can keep an eye on developing implications.
A national defense firm operating in dozens of states now faces at least three statutory regimes, one with extraterritorial reach, and a patchwork of regulation that is still being drafted. That alone is a compliance burden with cost implications, but one that firms should be able to manage.
For the defense, capital buys capability. The buildup of plaintiff-side capital and technology has created more demand for capabilities than defense firms can serve up on internally generated funds. Outside money could fund the trial talent, the negotiation infrastructure, and the technology that our own CLM research has repeatedly shown the defense bar lacks. Our industry has spent years complaining about an asymmetry in resources. This could be one answer to it.
At the same time, an investor with a return target and a hold period now sits behind a panel relationship built on continuity and relationship. Cost discipline that produces genuine efficiency is welcome. Cost discipline that affects staffing mix, experience levels, or the willingness to try a case is a different matter, and carriers will undoubtedly feel these implications in a myriad of ways.
There are practical questions in the interim. Who owns the matter data when a shared MSO technology platform sits behind several firms on your panel? Do your outside counsel guidelines contemplate an MSO at all? What conflicts arise when the same investor holds MSO positions across firms you use? And what will you expect a firm to tell you, given that at least one state has already made that disclosure a matter of statute rather than courtesy?
A Shared Problem
No carrier, no defense firm, and no service provider will work this out alone. Meanwhile the rules are being written state by state, quickly, by legislators who are hearing from advocacy groups more often than they hear from the organizations that will live with the results.
Several things will benefit us collectively: a common vocabulary, so we are all discussing the same thing; a shared set of diligence questions for panel firms, developed jointly with the firms rather than imposed; and coordinated engagement with regulators before the next three statutes look as different from one another as the last three. And lastly, an engaged dialogue across our industry about what it means for a firm’s back office to have a different owner than the firm itself.
We are better at that kind of collaborative work than we sometimes give ourselves credit for. This is a good occasion to prove it.
SIDEBAR: The Rules: Jurisdiction by Jurisdiction
ABA Model Rule 5.4: Prohibits nonlawyer ownership of law firms and fee-sharing with nonlawyers. In force in some form in nearly every state.
ABA Formal Opinion 91-360 (1991): A lawyer practicing in a jurisdiction that bars nonlawyer partnerships must follow that prohibition, regardless of where the firm is licensed. The reason alternative business structures have not gone national.
Arizona (2021): Eliminated Rule 5.4 and now licenses alternative business structures. 136 approved as of April 30, 2025. Utah, D.C., and Puerto Rico permit variations.
Texas Ethics Opinions 704 and 706 (2025): Opinion 706 held that tying an MSO’s fee to firm revenue is prohibited fee-splitting. Opinion 704 held that a Texas lawyer violates state rules by joining a nonlawyer-owned out-of-state firm.
California, AB 931: Signed October 2025. Restricts sharing contingency fees with out-of-state alternative business structures. Applies to contracts entered on or after Jan. 1, 2026; repeals Jan. 1, 2030. Exempts MSOs charging a flat fee, paying nothing for referrals or lead generation, and not scaling with recovery.
Colorado, HB26-1421: Signed June 2026, effective Aug. 12, 2026, sunsets Sept. 1, 2029. Effectively bars alternative business structures, permits MSOs but prohibits percentage-based fees, and creates a private right of action with extraterritorial reach.
Illinois, HB 5487 (Public Act 104-0801): Approved Aug. 7, 2026, effective on approval. Bars nonlawyer-owned entities from interfering with professional judgment or controlling client records and staffing, and prohibits any fee based directly or indirectly on firm fees, revenues, or profits. Requires firms party to an MSO agreement to disclose it, and its terms, in client contracts. Applies to firms with under $300 million in annual global legal services revenue, or to firms deriving more than half their revenue from contingent fees in each of the previous three years.
Federal disclosure legislation addressing litigation funding remains pending. Verify current status before relying on any item above.