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

44 Pages Posted: 5 Apr 2017 Last revised: 17 Apr 2017

See all articles by A. Mitchell Polinsky

A. Mitchell Polinsky

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

Steven Shavell

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

Multiple version iconThere are 2 versions of this paper

Date Written: March 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. In a basic case, the optimal subrogation provisions involve full retention by the insurer of the proceeds from a successful suit and the pursuit of all positive expected value suits. This eliminates litigation risks for insureds and results in lower premiums—financed by the litigation income of insurers, including from suits that insureds would not otherwise have brought. Moreover, optimal subrogation provisions are characterized in the presence of moral hazard, administrative costs, and non-monetary losses and it is demonstrated that optimal provisions entail sharing litigation proceeds with insureds in the first two cases but not when losses are non-monetary.

Suggested Citation

Polinsky, A. Mitchell and Shavell, Steven, Subrogation and the Theory of Insurance When Suits Can Be Brought for Losses Suffered (March 2017). NBER Working Paper No. w23303. Available at SSRN: https://ssrn.com/abstract=2946709

A. Mitchell Polinsky (Contact Author)

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Steven Shavell

Harvard Law School ( email )

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