Tort Liability and Settlement Failure: Evidence on Litigated Auto Insurance Claims
50 Pages Posted: 1 Aug 2016 Last revised: 2 Aug 2016
Date Written: February 20, 2016
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: Suggested Citation