Abstract

http://ssrn.com/abstract=1161775
 


 



Uncertainty, Insurance and the Learned Hand Formula


Peter Z. Grossman


Butler University - College of Business Administration

Reed W. Cearley


Cearley & Thompson

Daniel H. Cole


Indiana University Maurer School of Law; Indiana University School of Public and Environmental Affairs; Indiana University Bloomington - Workshop in Political Theory and Policy Analysis

March 2006

Law, Probability and Risk, Vol. 5, Issue 1, pp. 1-18, 2006

Abstract:     
Law and economics scholars have written extensively about how insurance markets affect the tort system. They have noted the beneficial cost-spreading function of insurance, as well as the detrimental incentive-distorting affects of insurance, stemming from the problems of adverse selection and moral hazard. Surprisingly, however, scholars have overlooked one of the most important salutary functions that insurance serves for the tort system: it provides much of the information that courts need to apply the marginal Learned Hand formula in negligence cases. The Learned Hand formula is an algebraic formula (B = PL), according to which liability turns on the relation between investment in precaution (B) and the product of the probability (P) and magnitude (L) of harm resulting from the accident. If PL exceeds B, then the defendant should be liable. If B equals or exceeds PL, then the defendant should not be held liable. This paper explains precisely how insurance markets collect and disseminate information about the expected values of all three variables in the Hand formula: the probability of accidents, the level of harm and the burden of precaution. This information is available to everyone, including those who choose not to purchase any insurance. Most importantly, in the absence of the information insurance markets provide, parties in many cases would have no way of cost-effectively determining, ex ante, the proper level of care to avoid liability/harm. Consequently, the Learned Hand formula could not effectively operate. This is not to say that the insurance markets provide complete information for making ex ante calculations of the expected value of accidents and avoidance measures. But in many (if not most) cases, insurance provides the best information available. Indeed, as a normative matter, judicial determinations of liability in accident cases might be improved by setting the burden of precaution using insurance market values as a baseline.

Keywords: torts, uncertainty, risk, insurance, negligence, information, learned hand formula

Accepted Paper Series


Not Available For Download

Date posted: July 17, 2008  

Suggested Citation

Grossman, Peter Z. and Cearley, Reed W. and Cole, Daniel H., Uncertainty, Insurance and the Learned Hand Formula (March 2006). Law, Probability and Risk, Vol. 5, Issue 1, pp. 1-18, 2006. Available at SSRN: http://ssrn.com/abstract=1161775 or http://dx.doi.org/10.1093/lpr/mgl012

Contact Information

Peter Z. Grossman (Contact Author)
Butler University - College of Business Administration ( email )
Indianapolis, IN 46208
United States
317-940-9727 (Phone)
Reed W. Cearley
Cearley & Thompson ( email )
220 W. Washington Street
Suite D
Lebanon, IN 46052
United States
Daniel H. Cole
Indiana University Maurer School of Law ( email )
211 S. Indiana Avenue
Bloomington, IN 47405
United States
Indiana University School of Public and Environmental Affairs ( email )
1315 East Tenth Street
Bloomington, IN 47405
United States

Indiana University Bloomington - Workshop in Political Theory and Policy Analysis ( email )
Indiana University Bloomington
Bloomington, IN
United States
(812) 855-4421 (Phone)
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