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

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.

HOW DOES TORT LAW AFFECT CONSUMER AUTO INSURANCE COSTS?

“…These tort laws are coded with explicit reference to their applicability in auto torts. These data are supplemented with information from Anderson et al (), who provide a catalog of no‐fault laws, and data on bad faith laws taken from Asmat and Tennyson ().…”

“…This approach identifies the impacts of tort law using within‐state variation arising from law changes, and measures the effects of changes to tort law under the assumption that there are no omitted factors from Equation (1) correlated with the passage of new laws that also affect auto insurance costs. A similar identification approach has been used in past studies of tort reform such as Currie and MacLeod (2008), Carvell (), and Asmat and Tennyson ().…”

“…These tort laws are coded with explicit reference to their applicability in auto torts. These data are supplemented with information from Anderson et al (2010), who provide a catalog of no-fault laws, and data on bad faith laws taken from Asmat and Tennyson (2014). 11 The public-use CEX files document cases where recoding occurs, allowing me to exclude these cases from the analysis.…”

“…9 Similarly, Browne and Schmit (2008) demonstrate an association between the tort environment of a state and the likelihood that auto crash victims consult an attorney and file suit, but they do not connect these differences in litigation behavior to premiums. Single reform studies include Hawken, Carroll, and Abrahamse (2001), Browne, Pryor, and Puelz (2004), Insurance Resource Council (IRC) (2011), and Asmat and Tennyson (2014) who examine insurer bad faith, and Anderson, Heaton, and Carroll (2010) who demonstrate that repeal of no-fault lowered average automobile premiums in three states.…”

How Cellphone Bans Affect Automobile Insurance Markets

“…While many studies consider the effects of no‐fault laws or the decisions to enact no‐fault laws (e.g., Harrington, ), additional studies consider the effects of other laws on the automobile insurance market. For example, Asmat and Tennyson () find that the threat of bad faith liability increases settlement amounts and curbs the likelihood of underpayment. Brown and Puelz () provide evidence that the various tort liability reforms have consequences for liability claim severity.…”