Tort Liability and Settlement Failure: Evidence on Litigated Auto Insurance Claims

50 Pages Posted: 1 Aug 2016 Last revised: 2 Aug 2016

See all articles by Danial Asmat

Danial Asmat

U.S. Department of Justice, Antitrust Division

Sharon L. Tennyson

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

Date Written: February 20, 2016

Abstract

This paper empirically tests the divergent expectations model of pre-trial bargaining by exploiting variation in tort liability for bad faith insurance law. Using a repeated cross-sectional dataset of auto insurance claims from the Insurance Research Council, it estimates that the tort remedy increased the likelihood of trial by over 20% in the short-term, but decreased the likelihood of trial by up to 10% in the long-term. Results are consistent with a divergent expectations model in which legal uncertainty, which is highest in the short-term, determines settlement likelihood through parties' subjective estimates of trial outcomes. Results are robust to sample selection bias, endogeneity in settlement time, and other state-level legislation on punitive damages limits and prejudgment interest. We conclude that policyholders and insurers negotiated in a manner consistent with divergent expectations.

Keywords: punitive, damages, bargaining, tort, settlement, litigation, insurance

JEL Classification: K41, K13, D81

Suggested Citation

Asmat, Danial and Tennyson, Sharon L., Tort Liability and Settlement Failure: Evidence on Litigated Auto Insurance Claims (February 20, 2016). Available at SSRN: https://ssrn.com/abstract=2816697 or http://dx.doi.org/10.2139/ssrn.2816697

Danial Asmat (Contact Author)

U.S. Department of Justice, Antitrust Division ( email )

450 Fifth St. NW
Room 9418
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HOME PAGE: http://sites.google.com/site/danialasmat/

Sharon L. Tennyson

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)

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