The Law and Economics of First-Party Insurance: Bad Faith Liability

Posted: 15 Nov 2009 Last revised: 18 Jun 2010

See all articles by Sharon L. Tennyson

Sharon L. Tennyson

Cornell University - Department of Policy Analysis & Management (PAM)

William J. Warfel

Indiana State University

Date Written: July 24, 2009

Abstract

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

Tennyson, Sharon L. and Warfel, William J., The Law and Economics of First-Party Insurance: Bad Faith Liability (July 24, 2009). Connecticut Insurance Law Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1506048

Sharon L. Tennyson (Contact Author)

Cornell University - Department of Policy Analysis & Management (PAM) ( email )

252 MVR Hall
Ithaca, NY 14853
United States
607-255-2619 (Phone)
607-255-4071 (Fax)

William J. Warfel

Indiana State University ( email )

Terre Haute, IN 47809
United States

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