Encouraging Insurers to Regulate: The Role (If Any) for Tort Law

Insurance companies are financially responsible for a substantial portion of the losses associated with risky activities in the economy. The more insurers can lower the risks posed by their insureds, the more competitively they can price their policies, and the more customers they can attract. Thus, competition forces insurers to be private regulators of risk. To that end, insurers deploy a range of techniques to encourage their insureds to reduce the risks of their insured activities, from charging experience-rated premiums to discounting premium rates for insureds who make specific behavioral changes designed to reduce risk. Somewhat paradoxically, however, tort law discourages insurers from engaging in the direct regulation of their insureds’ behavior. Under long-standing tort principles, if an insurer “undertakes” to provide serious risk-reduction services to its insured, the insurer can be found to have a duty of reasonable care in performing such services and, should that duty be breached, held liable for any harms caused to third parties. This application of tort principles to insurance companies could be contributing to the moral hazard problem often associated with insurance—the tendency of insurance to cause risk to increase rather than decrease. This Article explores this problem and analyzes a number of ways to encourage insurers to regulate—from insurer-specific Good Samaritan statutes (which we might call “carrots”) to the creation of an affirmative duty on the part of insurers to regulate through the expansion of tort liability (which would definitely be a “stick”). What combination of carrots and sticks produces the optimal insurer incentives to regulate their insureds’ behavior? That is the question this Article addresses

Solving the Judgment-Proof Problem

A tortfeasor who cannot fully pay for the harms that it causes is said to be judgment proof. Commentators have long recognized that the existence of judgment-proof tortfeasors seriously undermines the deterrence and insurance goals of tort law. The deterrence goal is undermined because, irrespective of the liability rule, judgment-proof tortfeasors will not fully internalize the costs of the accidents they cause. The insurance goal will be undermined to the extent that the judgment-proof tortfeasor will not be able to compensate fully its victims and that first-party insurance markets do not provide an adequate response. Liability insurance can ameliorate these so-called judgment-proof problems in two ways: First, if liability insurance is experience rated or feature rated, the presence of such insurance can induce tortfeasors to take appropriate steps to prevent accidents.5 Second, the presence of liability insurance increases the amount of assets available to compensate plaintiffs. This is because when a judgment-proof tortfeasor has purchased liability insurance, not only the tortfeasor\u27s assets but also the assets of the insurance company can potentially be used to compensate tort victims. However, because virtually all liability insurance policies contain policy limits and because only some liability insurance policyholders have sufficient assets to cover tort judgments that exceed those policy limits, some liability insureds will nevertheless be judgment-proof

If Taxpayers Can\u27t Be Fooled, Maybe Congress Can: A Public Choice Perspective on the Tax Transition Debate

In When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity , Shaviro takes the various strands of the existing literature on retroactivity and weaves them together, applying his unique combination of legal expertise, political pragmatism, and theoretical sophistication in public finance economics as well as political science. The result is a subtle, balanced, and scholarly treatise on transition relief and retroactivity that should serve as the starting point for all future research in the field. In its stated objectives, the book is admirably ambitious. This Review will, in a broad sense, follow Shaviro\u27s characterization of the book\u27s objectives. Part I will summarize the existing economic framework for analyzing legal transitions and retroactivity issues (with major emphasis on tax transitions). Although Shaviro makes numerous interesting contributions to this framework, this Review will examine only the two most significant of these. That will be done in Part II. Then, Part III will focus on Shaviro\u27s principal innovation: his introduction of a thoroughgoing public choice perspective and CTB ideology to the tax transitions debate

Legal Transitions, Rational Expectations, and Legal Progress

In the literature on legal transitions, the term transition policy is generally understood to mean a rule or norm that influences policymakers\u27 decisions concerning the extent to which legal change should be accompanied by transition relief, whether in the form of grandfathering or phase-ins or direct compensation. Legal change within this literature is defined broadly, and somewhat counter-intuitively, to include any resolution of the uncertainty regarding what the law will be in the future or how the law will be applied to future circumstances. Thus, a legal change would obviously include an unexpected repeal of a tax provision, such as the home mortgage interest deduction, or a shift in tort law from a negligence or fault-based regime to a strict liability regime.\u27 Perhaps less obviously, however, a legal change will also be said to have occurred under this framework in circumstances in which the statutory law or an existing common law rule remains unchanged, but is applied, either by courts or by some regulatory agency, in ways that the relevant private parties were not expecting. Thus, a transition issue [and hence the need to choose a transition policy] will be said to arise whenever an act has future consequences and the legal regime applicable to those future consequences is not known with certainty at the outset. As it turns out, according to the consequentialist-or law-and-economicsframework that has come to dominate legal scholarship on transition issues, whether certain types of legal change should be applied retroactively or prospectively and, more generally, the extent to which the government should seek to eliminate transition losses and gains turns on the answers to two sets of questions. This Article focuses on these two questions and, in evaluating them, seeks to make the strongest possible consequentialist-here, incentive-based-argument in support of applying legal change retroactively in certain contexts. First, under what circumstances will private parties-whether individuals or firms-make unbiased assessments of the likelihood and nature of legal change and of the transition policy that will be applied? Second, should legal change be expected, over the long run, to move in a desirable direction? To put this second question differently, in what areas or with respect to what types of law can we assume that there will be legal progress

Faculty Spotlight - Kyle D. Logue

Most of my teaching and research efforts are currently spent in two general fields of law - taxation and insurance. Which raises an interesting question: Why would a rational person decide to devote a good portion of his academic career to areas of law that many people - lawyers and nonlawyers alike - find painfully boring and unreasonably complicated? The ta and insurance lawyers in the audience, of course, already know the answer - that ta ation and insuran e are e ceptionally interesting topics and that, if one wants to understand how the real world works (in particular, the world of commerce), one must understand how the existence of taxes and insurance shape things. To provide a clearer picture of what I find interesting and important in these areas, let me briefly summarize three of my recent research projects

The Current Life Insurance Crisis: How the Law Should Respond

This article explores some of the issues raised by the new evidence of underinsurance. Part I explores the initial theoretical question: why do people buy life insurance? Put differently, what function does life insurance serve? Part II provides some background on the life insurance market as it currently exists. Thus, Part II summarizes the major types of life insurance that are currently offered and summarizes the main elements of the current regulatory regime for life insurance companies. Part III then provides support for the claim that households tend to drastically underconsume life insurance. Section A of that Part summarizes the existing empirical evidence, which finds substantial and widespread underinsurance. As I will point out, however, the scholars conducting those studies take pains to avoid reaching any normative conclusions based on their findings. In other words, although they do find substantial and widespread underinsurance, (almost paradoxically) they assert that such a finding does not imply that too little insurance is being bought. There is no paradox, however. The economists are simply demonstrating their awareness of the theoretical difficulty of specifying the right amount of life insurance coverage. Although it is impossible to answer that question definitively, in section B, this article favors a baseline that defines adequacy as that amount of life insurance necessary to maintain the survivors\u27 standard of living, which happens to be the baseline that the researchers used in their empirical studies. That standard-of-living baseline will be controversial in some circles and, after a period of public debate, may be ultimately rejected. That outcome would be perfectly acceptable, so long as the debate takes place and households are forced to think seriously about what the right amount of life insurance is for their needs. Indeed, the main objective of this article is to start such a discussion. However, this article seeks to push the debate one step beyond the adequacy question. Therefore, Part IV reviews a number of theoretical reasons why the economists\u27 empirical evidence should be given a normative slant; that is, why the evidence should be interpreted as indicating a true underinsurance problem and why, therefore, further government intervention may indeed be appropriate. These reasons to be worried include the same sort of externality and behavioral rationales that have been offered for government intervention in other contexts

Tax Transitions, Opportunistic Retroactivity, and the Benefits of Government Precommitment

What if the current federal income tax laws were repealed and replaced with a simple flat tax? What if the entire Internal Revenue Code (with its graduated rates and countless deductions, exclusions, and credits) were scuttled in favor of a broad-based consumption tax? Only a few years ago, such proposals would have seemed radical and extremely unlikely to be adopted. But times are changing. Calls for a drastic overhaul of the Internal Revenue Code have become commonplace, even at the highest levels in the tax-policy community. In addition, proposals that would replace the income tax with a flat-rate broad-based consumption tax have received substantial bipartisan support in Congress. And many commentators believe that Congress is likely to enact some version of these proposals in the not-too-distant future. One of the most important issues raised by the prospect of radical tax reform is that of transition effects. Each of the tax-reform proposals currently under consideration would eliminate many of the deductions, exclusions, and credits that individuals and businesses have come to rely upon. Therefore, unless Congress accompanies the repeal of those provisions with some form of transition relief (such as grandfathered, phased-in, or delayed effective dates) any taxpayer who made an investment in reliance on the prior rule will suffer substantial transition losses, losses in the value of pretransition investments

Encouraging Insurers to Regulate: The Role (If Any) for Tort Law

Insurance companies are financially responsible for a substantial portion of the losses associated with risky activities in the economy. The more insurers can lower the risks posed by their insureds, the more competitively they can price their policies, and the more customers they can attract. Thus, competition forces insurers to be private regulators of risk. To that end, insurers deploy a range of techniques to encourage their insureds to reduce the risks of their insured activities, from charging experience-rated premiums to giving special premium discounts to insureds who make specific behavioral changes designed to reduce risk. Somewhat paradoxically, however, tort law discourages insurers from engaging in the direct regulation of their insureds’ behavior. Under longstanding tort principles, if an insurer “undertakes” to provide serious risk-reduction services to an insured, the insurer can be found to have a duty of reasonable care and, should that duty be breached, held liable for any harms caused to third parties. This application of tort principles to insurance companies could be contributing to the moral hazard problem often associated with insurance — the tendency of insurance to cause risk to increase rather than decrease. This Article explores this problem and analyzes a number of ways to encourage insurers to regulate — from insurer-specific Good Samaritan statutes (which we might call a “carrot”) to the expansion of tort principles to create an affirmative duty on the part of insurers to regulate (which would definitely be a “stick”). What combination of carrots and sticks produces the optimal insurer incentives to regulate their insureds’ behavior? That is the question the Article addresses