The effects of state legal environments on automobile insurance claims and compensation: Evidence from the Royal Globe doctrine

Abstract

This paper uses the historic 1979 California Supreme Court decision in Royal Globe Insurance Company v. Superior Court to examine the effects of expanding insurers' legal liability in claims disputes. The decision expanded insurers' good‐faith duty to settle liability claims to the injured third‐party claimant, extending the set of eligible plaintiffs to those with the greatest incentive to sue. The legal environment created by this decision changed payoffs for insurers and claimants in third‐party claims negotiations with potential effects for insurance claiming and compensation. Using data on automobile bodily injury liability claims, we make use of the quasi‐experimental nature of this decision to examine these effects. We find that Royal Globe led to larger claimed amounts of loss and higher claim payments for claims involving only minor strain injuries. Such claims were also more likely to involve attorney representation and were less likely to be closely examined by insurers after Royal Globe.