Legal Ambiguity, Liability Insurance, and Tort Reform
New York University School of Law
July 12, 2011
DePaul Law Review, Vol. 60, 2011
NYU School of Law, Public Law Research Paper No. 11-49
NYU Law and Economics Research Paper No. 11-22
Legal ambiguity refers to an unknown outcome regarding the requirements of a legal rule or body of law, as applied to a set of known facts, for which the probability cannot be confidently or reliably defined and must be estimated by decision makers. The legal ambiguity generated by the tort system became significantly more pronounced over the course of the twentieth century, making the market for liability insurance increasingly volatile. Without reliable estimates of the relevant probabilities (the likelihood of a policyholder incurring tort liabilities and the amount thereof), insurers must use subjective estimates of risk that are prone to forecasting errors with the resultant swings in profits and losses. Legal ambiguity increases the cost of capital for insurers (and therefore premiums) and creates an expectations-driven pricing structure that is prone to cyclical volatility, including periods of substantial underwriting losses that disrupt the supply of liability insurance. Due to these market disruptions, liability insurers have supported tort reform measures that reduce the unpredictability of the liability costs covered by the insurance policy, making it easier for them to set premiums. The movement has been successful, and the vast majority of states by now have legislatively curbed tort liability, with common reforms involving damage caps and the elimination of joint and several liability. Although different in substance, the varied reforms share the trait of significantly reducing systemic legal ambiguity, which in turn makes it easier for liability insurers to forecast their expected liabilities. Tort reform has become biased towards reductions of ambiguity that enhance the predictability of liability insurance, regardless of whether the reforms address the problem of ambiguity in a fair or just manner. Each of these factors has become increasingly important over the course of the twentieth century, producing an evolutionary path for the tort system that is now shaped by the interplay between legal ambiguity, liability insurance, and legislative tort reform.
Number of Pages in PDF File: 35
Date posted: July 14, 2011
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