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http://ssrn.com/abstract=1604979
 
 

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The Effect of Bad-Faith Laws on First-Party Insurance Claims Decisions


Mark J. Browne


University of Wisconsin - Madison - School of Business

Ellen S. Pryor


UNT Dallas College of Law

Robert Puelz


Southern Methodist University (SMU) - Edwin L. Cox School of Business

2004

Journal of Legal Studies, Vol. 33, p. 355, 2004

Abstract:     
This Article represents the first empirical study of the effects of bad-faith laws on claims decisionmaking by insurance companies. One of the most notable and debated developments in the law of tort and insurance since the 1970s has been the recognition in many states of an extracontractual cause of action against insurers for the bad-faith denial of a claim filed by an insured for benefits allegedly due under the policy. We examine whether the existence of this remedy affects the amount, timing, or allocation of payments to insureds made in the “shadow of the law” of bad faith. We drew on the 1992 closed claims database developed by the Insurance Research Council compiling thousands of closed claims under automotive insurance policies by over 60 insurance companies. These claims include many categories of payments; we concentrated on claims for uninsured motorist coverage (UM) or underinsured motorist coverage (UIM) because these are categories of “first-party” insurance to which the extracontractual bad faith remedy applies in states that allow such a remedy. Although a majority of states recognizes a remedy for bad faith, 15 states within the IRC database did not recognize bad faith claims. Thus, by controlling for other variables that could affect payment - including significance of injury, tort reform measures, attorney involvement, and others - we could determine whether the existence of a bad faith remedy affects the timing, amount, or allocation of insurance payments for UM or UIM claims. The study shows that the presence of a bad faith remedy is tied to higher claims payments for claims. In addition, the higher overall settlements apply both to the economic and to the noneconomic aspects of the damages underlying the claims. Further, and somewhat surprisingly, we found that bad faith laws are associated with a greater increase in settlement amounts when plaintiffs are not represented by an attorney.

Number of Pages in PDF File: 37

Keywords: bad faith, insurance

JEL Classification: K13, K41

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Date posted: May 13, 2010 ; Last revised: August 5, 2010

Suggested Citation

Browne, Mark J. and Pryor, Ellen S. and Puelz, Robert, The Effect of Bad-Faith Laws on First-Party Insurance Claims Decisions (2004). Journal of Legal Studies, Vol. 33, p. 355, 2004. Available at SSRN: http://ssrn.com/abstract=1604979

Contact Information

Mark J. Browne
University of Wisconsin - Madison - School of Business ( email )
975 University Avenue
Madison, WI 53706
United States
608-263-3030 (Phone)
608-265-4195 (Fax)
Ellen S. Pryor (Contact Author)
UNT Dallas College of Law ( email )
1901 Main Street
Dallas, TX 75201
United States
(214) 752-5959 (Phone)
HOME PAGE: http://www.untsystem.edu
Robert Puelz
Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )
P.O. Box 750333
Dallas, TX 75275-0333
United States
214-768-4156 (Phone)
214-768-3713 (Fax)
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