Insurance

Question 1

Kinds of Insurance

Answer 1

• loss insurance

- liability insurance

Question 2

Loss Insurance

Answer 2

• 1st party insurance

- bought in the expectation that you might be the victim of some misfortune

Question 3

Liability Insurance

Answer 3

• 3rd party insurance

- bought in the expectation that you as an actor may cause harm to someone else for which you will be legally liable

Question 4

Collateral Source Rule

Answer 4

• if pl collects damages from collateral source (such as loss insurance) those damages will not be considered in reducing damages in court
• pro: def would be responsible for all damages inflicted on victim
• con: pl gets double recovery -> to prevent this, insurance co’s often require pl to refund loss insurer for damages collected in court

Question 5

Subrogation Rule

Answer 5

• insurance co pays damages and in return assumes right to sue actor who caused harm

Question 6

Liability Insurance - General Points

Answer 6

• tort is a tax harm system for accident reparation
• logic of liability insurance also carries over to loss insurance
• risk distinguished from harm - risk = PL (chance that a harm may be suffered)

Question 7

Liability Insurance - How does this work?

Answer 7

• concept of 1000 negligent actors who all create same risk - only one actually causes the anticipated harm -> this would mean that one would have to pay huge amount, + others have no cost
• SOLUTION: liability insurance reduces risk by combining sufficient number of exposure units to make individual losses collectively predictable
• scheme of mutual support

Question 8

Liability Insurance - Tax Harm vs. Tax Risk

Answer 8

• liability insurance = method for transforming tax harm into tax risk - creates pool by taxing risk and then pays damages to harmed person from the pool (thereby also avoiding situation where one actor faced w/ crushing liability)

Question 9

Effects of Liability Insurance

Answer 9

• changes effect of liability by not only shifting loss from pl to def but by shifting and spreading among pool

Since risk now shared, some classical immunities no longer make sense + wind up being abolished:

• charitable immunity abolished in Pierce v. Yakima Valley Memorial Hospital (1953)
• sovereign immunity abolished in Hicks v. State (1975)
• note - the above ex’s are state courts, think general trend rather than clear abolishing

Question 10

Policy Justifications of Liability Insurance

Answer 10

• everyone can insure -> means no one should be immune from liability + pl’s should get their due damages
• spreading justification (burden shouldn’t fall on only victim but on all)
• marginal increase in deterrence (premiums better than nothing)
• risk of crushing liability will not prevent worthwhile activities

Question 11

Calculation of Risk Premiums - In Principles

Answer 11

• tax risk according to how much risk actors throw out
• risk meters would ideally determine how much each actor should contribute to pool
• not possible though - insurance is often pre-paid (vs. risk can change) + impossibility of monitoring how much risk each person is throwing out

Question 12

Calculation of Risk Premiums - In Practice

Answer 12

• manual rates: rate risk in terms of rough categories + charge actors w/in category the same premium
• ->calculating in terms of the class (usually very broad) rather than the individual
• law of large numbers also used - can’t know what individuals will do but can know what large group of similar individuals will do

Question 13

Problem with Liability Insurance

Answer 13

• deterrent effect of tort judgment is significantly undercut (careful and careless lumped together)
• qualification: experience and merit rating (use last year’s data to predict next year’s performance -> doesn’t really make sense on a factual level, since element of luck in being caught means same actor unlikely to actually cause the same harm, but operates to send message more than anything else)

Question 14

Small Actors vs. Large Actors

Answer 14

• small actors create risk infrequently + impact of harm/liability greater than for large actors -> incentive to pool in tax-risk system
• large actors - can bear costs more easily than small actors, + can also judge own probability of liability better than in a pool (large enough that can see class of events w/in its own scope of activity) -> incentive to self-insure -> some large enough to be a pool unto themselves (self-administered risk tax)

Question 15

Large Actors and Deterrence

Answer 15

• deterrence pressure REMAINS for large actors -> b/c they self-insure, they gain from own safer behavior -> tax risk = tax harm
• past experience for large actors = more reliable (almost perfect) predictor of future -> more credibility