Settlement with Insurer Duty to Settle: Structural Model and Evidence from Malpractice Claims
Bernard S. Black
Northwestern University - School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)
Prior models and studies of settlement ignore the insurer’s “duty to settle” – the obligation to settle within policy limits if it would be unreasonable to refuse a within-limits settlement offer. We incorporate the duty to settle into a structural model of settlement of medical malpractice claims, and then estimate the model using maximum likelihood methods applied to a Texas closed claims database. Both the data and our model predict: a mass of cases with a settlement demand by the plaintiff exactly at limits; a smaller but still sizeable mass of cases with settlement exactly at limits; very few above-limits payments by insureds; and when above-limits payments are made, they are often by insurers. The model does a reasonable job in predicting data moments, including fractions of cases settled at limits, settled above limits, and tried. Using the model in counterfactual analysis, we predict: (i) with no duty to settle, more cases will be tried; (ii) with strict insurer liability for not settling within limits, there will be fewer trials and more above limits payments by insurers; and (iii) the duty to settle will rarely cause insurers to pay more than the expected value of claims.
Number of Pages in PDF File: 30working papers series
Date posted: October 23, 2011 ; Last revised: November 1, 2011
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