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The Multiplication Effect of Legal Insurance

32 Pages Posted: 16 Dec 2016  

Ben Depoorter

University of California Hastings College of Law; Ugent - CASLE; Stanford CIS

Jef P. B. De Mot

Ghent University

Michael G. Faure

University of Maastricht - Faculty of Law, Metro; Erasmus University Rotterdam (EUR) - Erasmus School of Law

Date Written: December 15, 2016

Abstract

Because legal insurance policies cover the expenses of plaintiffs in bringing legal claims, such policies increase the risk of negligent or careless acts by tortfeasors. For this reason, potential tortfeasors would prefer to avoid injuring holders of legal insurance policies. Since insurance coverage (or lack thereof) is not observable to a tortfeasor prior to an accident, tortfeasors can never exercise this preference ex ante. As a result, insured tort victims provide deterrence benefits to those that are uninsured by increasing the overall expected costs of engaging in negligent, harmful behavior. In magnifying a tort offender’s overall risk of facing legal action, this multiplication effect of insurance policies enhances deterrence, inducing increased overall safety levels.

Unfortunately, however, the multiplication effect of legal insurance reduces the demand for legal expense insurance policies. Because policyholders do not capture the full benefits of legal insurance policies on safety, too few individuals sign up for such policies. As a result of this public good effect, the average price of insurance policies remains high, which reduces the demand for legal expense insurance policies. In revealing these overlooked collective action issues, this Article opens new inroads for policy discussions regarding legal insurance markets.

Suggested Citation

Depoorter, Ben and De Mot, Jef P. B. and Faure, Michael G., The Multiplication Effect of Legal Insurance (December 15, 2016). 13 New York University Journal of Law and Business 1 (2016); UC Hastings Research Paper No. 225. Available at SSRN: https://ssrn.com/abstract=2886123

Ben Depoorter (Contact Author)

University of California Hastings College of Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

Ugent - CASLE ( email )

Universiteitstraat 4
Belgium

Stanford CIS ( email )

559 Nathan Abbott Way
Stanford, CA 94305-8610
United States

Jef P. B. De Mot

Ghent University ( email )

Universiteitsstraat 4
Ghent, 9000
Belgium

Michael G. Faure

University of Maastricht - Faculty of Law, Metro ( email )

PO Box 616
Maastricht, 6200 MD
Netherlands
+31 - 43 - 388 30 60 (Phone)
+31 - 43 - 325 90 91 (Fax)

HOME PAGE: http://www.michaelfaure.be

Erasmus University Rotterdam (EUR) - Erasmus School of Law ( email )

3000 DR Rotterdam
Netherlands

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