Abstract

http://ssrn.com/abstract=2370099
 


 



Mandatory Rules and Default Rules in Insurance Contracts


Tom Baker


University of Pennsylvania Law School

Kyle D. Logue


University of Michigan Law School

August 27, 2014

In The Law & Economics of Insurance (Elgar Publishing, Forthcoming)
U of Michigan Law & Econ Research Paper No. 13-024
U of Michigan Public Law Research Paper No. 377
U of Penn, Inst for Law & Econ Research Paper No. 13-38

Abstract:     
The economic analysis of contract law can be organized around two general questions: (1) what are the efficient or welfare-maximizing substantive rules of contract law; and (2) once those rules have been identified, when if ever should they be made mandatory and when should they be merely “default rules” that the parties can contract around if they wish? Much of contract theory over the past twenty years has been devoted to developing answers to those two questions. The same two questions can be posed with respect to the rules of insurance law. Although previous scholars have examined particular substantive doctrines of insurance law (such as contra proferentem and the “duty to settle”), insurance law scholars as well as courts and legislatures have largely ignored whether and under what circumstances rules of insurance law generally should be mandatory. This article begins to fill that gap in the literature. The article articulates a straightforward efficiency-based approach to drawing the line between which rules in insurance law should be considered mandatory and which should be changeable by agreement of the parties. Specifically, the article suggests drawing the line in a way that is consistent with the market-failure rationale that justifies making contract rules mandatory in the first place. This same principle would apply to all contracts, not only insurance contracts. The article describes how insurance law currently draws the line between mandatory rules and default rules and evaluates whether those boundaries are consistent with the applicable market failure rationales. In addition, the article takes into account the unique role that state insurance regulators can play in helping courts decide which rules of insurance law, or terms in insurance contracts, are mandatory and which are defaults. Finally, the article explains how the rules/standards distinction must be considered in the design of the optimal mandatory/default-rule boundary.

Number of Pages in PDF File: 43

Keywords: contract law, insurance, rules, default, mandatory

JEL Classification: K12

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Date posted: December 21, 2013 ; Last revised: September 5, 2014

Suggested Citation

Baker, Tom and Logue, Kyle D., Mandatory Rules and Default Rules in Insurance Contracts (August 27, 2014). U of Michigan Public Law Research Paper No. 377; In The Law & Economics of Insurance (Elgar Publishing, Forthcoming); U of Michigan Law & Econ Research Paper No. 13-024; U of Michigan Public Law Research Paper No. 377; U of Penn, Inst for Law & Econ Research Paper No. 13-38. Available at SSRN: http://ssrn.com/abstract=2370099

Contact Information

Tom Baker
University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
215-746-2185 (Phone)
HOME PAGE: http://www.law.upenn.edu/cf/faculty/thbaker/
Kyle D. Logue (Contact Author)
University of Michigan Law School ( email )
625 South State Street
Ann Arbor, MI 48109-1215
United States
734.936.2207 (Phone)
HOME PAGE: http://cgi2.www.law.umich.edu/_FacultyBioPage/facultybiopagenew.asp?ID=220

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