Research Handbook on the Economics of Insurance Law

Research Handbook on the Economics of Insurance Law

Research Handbooks in Law and Economics series

Edited by Daniel Schwarcz and Peter Siegelman

Insurance law and insurance economics each have long and distinguished scholarly histories, but participants in the two disciplines have not always communicated well across academic silos. The Handbook encourages more policy-relevant insurance economics scholarship and more economically sophisticated legal scholarship by bringing together original contributions from leading scholars in insurance law and insurance economics on a range of issues involving insurance law and regulation.

Chapter 13: Basic economics of the defense of covered claims

Charles Silver

Subjects: law - academic, commercial law, insurance law, law and economics


Liability insurance arrangements generate wealth by transferring risks from policyholders to insurers, who can bear them more cheaply. One such risk attends the defense of covered claims. The cost of defending claims has considerable potential to vary, and the manner of conducting the defense can affect the amount paid to a claimant. It is therefore important to deploy resources efficiently when defending claims. The standard law and economics approach to contracting suggests that suitable arrangements will evolve when liability coverage is sold in competitive markets, because carriers and policyholders should prefer arrangements that maximize their joint wealth. This chapter describes the basic economics of the defense of covered claims. It also discusses contractual arrangements and other devices that insurers and policyholders use to defend liability claims. Although these working arrangements are imperfect, they have obvious and strong efficiency justifications.

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