Uncertainty, Insurance, and the Learned Hand Formula

36 Pages Posted: 10 Jan 2006

See all articles by Peter Z. Grossman

Peter Z. Grossman

Butler University - College of Business Administration

Reed W. Cearley

Cearley & Thompson

Daniel H. Cole

Indiana University Maurer School of Law; Indiana University School of Public and Environmental Affairs

Multiple version iconThere are 2 versions of this paper

Date Written: October 12, 2006

Abstract

Law and economics scholars have written extensively about how insurance markets affect the tort system. They have noted the beneficial cost-spreading function of insurance, as well as the detrimental incentive-distorting affects of insurance, stemming from problems of adverse selection and moral hazard. Surprisingly, however, scholars have over-looked one of the most important salutary functions that insurance serves for the tort system: it provides much of the information courts need to apply the Marginal Learned Hand Formula. This paper explains precisely how insurance markets collect and disseminate information about the expected values of all three variables in the Hand Formula: the probability of accidents, the level of harm, and the burden of precaution. In the absence of the information insurance markets provide, parties in many cases would have no way of cost-effectively determining, ex ante, the proper level of care. Consequently, the Learned Hand Formula could not effectively operate. Although insurance markets cannot provide complete or perfect information for making ex ante calculations of the expected value of accidents and avoidance measures, in many (if not most) cases, insurance provides the best information available. Indeed, as a normative matter, judicial determinations of liability in accident cases might be improved by setting the burden of precaution using insurance market values as a baseline.

Keywords: accidents, torts, insurance, Learned Hand Formula, information

JEL Classification: D81, G22, K13

Suggested Citation

Grossman, Peter Z. and Cearley, Reed W. and Cole, Daniel H., Uncertainty, Insurance, and the Learned Hand Formula (October 12, 2006). Available at SSRN: https://ssrn.com/abstract=874488 or http://dx.doi.org/10.2139/ssrn.874488

Peter Z. Grossman

Butler University - College of Business Administration ( email )

Indianapolis, IN 46208
United States
317-940-9727 (Phone)

Reed W. Cearley

Cearley & Thompson ( email )

220 W. Washington Street
Suite D
Lebanon, IN 46052
United States

Daniel H. Cole (Contact Author)

Indiana University Maurer School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States

Indiana University School of Public and Environmental Affairs ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

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