The Law and Economics of First-Party Insurance: Bad Faith Liability
Posted: 15 Nov 2009 Last revised: 18 Jun 2010
Date Written: July 24, 2009
States differ in the legal avenues available to policyholders to pursue actions against their insurers for bad faith in claims settlement. This article discusses the various approaches to first-party insurance bad faith law that have been taken by the states, and discusses the potential benefits and costs of different approaches. Regimes that are likely to grant large damages awards to aggrieved policyholders provide the greatest deterrent to insurer bad faith; but such regimes may also create incentives for fraudulent insurance claiming and disincentives for rigorous claims investigations by insurers. The article evaluates the empirical relevance of these potential incentive distortions through an analysis of automobile insurance claim settlement data in states with different bad faith regimes. The data show that claim characteristics and claim investigations differ significantly in states that permit tort-based bad faith from those in other states, in ways consistent with the hypothesized effects.
Keywords: insurance, bad faith
JEL Classification: G22, G28, K13
Suggested Citation: Suggested Citation