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The Law and Economics of the Environment

Edited by Anthony Heyes

This outstanding book focuses on how economics can contribute to the design, implementation and appraisal of legal systems that create the ‘right’ incentives for environmental protection. The sixteen original and specially commissioned contributions – written by some of the leading names in their field – span many of the important areas of contemporary interest and employ case study material combined with theoretical, empirical and experimental research.
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Chapter 15: Environmental damages in court: the American Trader case

Howard C. Kunreuther and Paul K. Freeman


14. Insurability, environmental risks and the law Howard C. Kunreuther and Paul K. Freeman* INTRODUCTION This chapter makes the case for utilizing insurance rather than the liability system to provide protection against some chronic or sudden environmental risks. A chronic risk has a long lead time between the actual exposure to a particular toxic substance and the occurrence of a disease. A classic example is the long delay (often 20 years or more) between exposure to asbestos and the contraction of mesothelioma (a cancer affecting the membrane lining of the chest cavity). A sudden risk is exemplified by releases of chemicals that can cause death or sickness at the time of the accident, such as the Union Carbide disaster in Bhopal, India in 1984. There seems to be a growing consensus among researchers and practitioners that the current liability system in the United States is not working well in dealing with environmental risks. Rather than continuing to rely on the courts for addressing many environmental risks, we propose that a set of enforceable insurance contracts be developed that can be used in combination with other policy tools such as third-party inspections and/or well-specified performance standards. Insurance should protect a firm’s assets from perceived random claims while providing compensation to a victim without the high transaction costs associated with the liability system. The next section discusses the current liability system. The third section then considers when insurance may be a more promising policy tool for dealing with environmental risks by examining...

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