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Research Handbook on the Economics of Torts

Research Handbook on the Economics of Torts

Research Handbooks in Law and Economics series

Edited by Jennifer H. Arlen

This pioneering Handbook contains specially-commissioned chapters on tort law from leading experts in the field. This volume evaluates issues of vital importance to those seeking to understand and reform the tort law and the litigation process, taking a multi-disciplinary approach, including theoretical economic analysis, empirical analysis, socio-economic analysis, and behavioral analysis. Topics discussed include products liability, medical malpractice, causation, proximate cause, joint and several liability, class actions, mass torts, vicarious liability, settlement, damage rules, juries, tort reform, and potential alternatives to the tort system. Scholars, students, legal practitioners, regulators, and judges with an interest in tort law, litigation, damages, and reform will find this seminal Handbook an invaluable addition to their libraries.

Chapter 7: The law and economics of liability insurance: A theoretical and empirical review

Tom Baker and Peter Siegelman

Subjects: economics and finance, law and economics, law - academic, law and economics, law of obligations


Tort cases are typically denominated in terms of a victim suing an injurer. But injurers do not typically pay the damages (if any) for which they are held liable, insurers do. The presence of insurance shapes who is sued, and for what; it shapes litigation strategy and settlement negotiations; and, in some cases, it even affects the underlying liability itself (Baker 2006). Indeed, echoing the great biologist Theodosius Dobzhansky, we suggest that little or nothing in tort law makes sense except in the light of liability insurance. In similar fashion, Kenneth Abraham (2008) describes the relationship between tort law and liability insurance using the metaphor of a binary star: separate bodies that form a common gravitational field. Tort’s deterrence function requires that injurers internalize the social costs of the injuries they cause when they fail to take due care. Liability insurance would seem to sever the link between injurers’ behavior and its financial consequences, since the insured risk takers would seem to have little reason to pay for a loss for which others are liable.

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