Does the Threat of Insurer Liability for “Bad Faith” Affect Insurance Settlements?

Authors

  • Danial P. Asmat,

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    • Danial P. Asmat is a Ph.D. student in the Department of Business Economics and Public Policy at the University of Michigan. Sharon Tennyson is Associate Professor of Policy Analysis and Management at Cornell University. The authors can be contacted via e-mail: danial.asmat@gmail.com and sharon.tennyson@cornell.edu, respectively. The Insurance Research Council (IRC) provided data for the empirical analysis. Useful comments were received from Tom Baker and from seminar participants at Cornell Law School, Georgia State University, Florida State University, Temple University, the World Risk and Insurance Economics Conference, and the ARIA session at the Allied Social Science Association meetings. The authors remain solely responsible for the content of the work.
  • Sharon Tennyson

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    • Danial P. Asmat is a Ph.D. student in the Department of Business Economics and Public Policy at the University of Michigan. Sharon Tennyson is Associate Professor of Policy Analysis and Management at Cornell University. The authors can be contacted via e-mail: danial.asmat@gmail.com and sharon.tennyson@cornell.edu, respectively. The Insurance Research Council (IRC) provided data for the empirical analysis. Useful comments were received from Tom Baker and from seminar participants at Cornell Law School, Georgia State University, Florida State University, Temple University, the World Risk and Insurance Economics Conference, and the ARIA session at the Allied Social Science Association meetings. The authors remain solely responsible for the content of the work.

Abstract

Economic reasoning predicts that policyholders in states that treat for insurer bad faith in settling claims as a tort should receive higher payments from insurers because of the greater potential damages insurers face in claims disputed in court. We test this hypothesis using data on automobile insurance claims for accidents occurring during 1972–1997, exploiting differences in states “laws and variation in timing of states” adoption of bad faith rules to identify the effects of tort liability. We find that the presence of tort liability for insurer bad faith increases settlement amounts and reduces the likelihood that a claim is underpaid.

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