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Subrogation and the Theory of Insurance When Suits Can Be Brought for Losses Suffered

46 Pages Posted: 29 Mar 2017 Last revised: 5 Apr 2017

A. Mitchell Polinsky

Stanford Law School; National Bureau of Economic Research (NBER)

Steven Shavell

Harvard Law School; National Bureau of Economic Research (NBER)

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Date Written: March 9, 2017

Abstract

The theory of insurance is considered here when an insured individual may be able to sue another party for the losses that the insured suffered — and thus when an insured has a potential source of compensation in addition to insurance coverage. Insurance policies reflect this possibility through so-called subrogation provisions that give insurers the right to step into the shoes of insureds and to bring suits against injurers. We show that subrogation provisions are a fundamental feature of optimal insurance contracts because they relieve litigation-related risks and result in lower premiums — financed by the litigation income of insurers. This income includes earnings from suits that insureds would not otherwise have brought. We also characterize optimal subrogation provisions in the presence of loading costs, moral hazard, and non-monetary losses.

Keywords: insurance, subrogation, accidents, torts, litigation, loading costs, moral hazard, non-monetary losses

Suggested Citation

Polinsky, A. Mitchell and Shavell, Steven, Subrogation and the Theory of Insurance When Suits Can Be Brought for Losses Suffered (March 9, 2017). Stanford Law and Economics Olin Working Paper No. 506; Harvard Public Law Working Paper No. 17-04. Available at SSRN: https://ssrn.com/abstract=2942448 or http://dx.doi.org/10.2139/ssrn.2942448

A. Mitchell Polinsky (Contact Author)

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National Bureau of Economic Research (NBER)

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Steven Shavell

National Bureau of Economic Research (NBER)

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Harvard Law School ( email )

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