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

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  • Danial P. Asmat
  • Sharon Tennyson

Abstract

type="main" xml:lang="en"> 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.

Suggested Citation

  • Danial P. Asmat & Sharon Tennyson, 2014. "Does the Threat of Insurer Liability for “Bad Faith” Affect Insurance Settlements?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(1), pages 1-26, March.
    • Handle: RePEc:bla:jrinsu:v:81:y:2014:i:1:p:1-26
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    Cited by:

    1. Nicola Gennaioli & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2022. "Trust and Insurance Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 35(12), pages 5287-5333.
    2. Jean-Marc Bourgeon & Pierre Picard, 2014. "Fraudulent Claims and Nitpicky Insurers," American Economic Review, American Economic Association, vol. 104(9), pages 2900-2917, September.
    3. M. Martin Boyer, 2020. "Cyber insurance demand, supply, contracts and cases," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 45(4), pages 559-563, October.
    4. Jean‐Marc Bourgeon & Pierre Picard, 2020. "Insurance law and incomplete contracts," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1253-1286, December.
    5. Christian Siemering, 2021. "The economics of dishonest insurance companies," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 46(1), pages 1-20, March.
    6. Peter, Richard & Ying, Jie, 2020. "Do you trust your insurer? Ambiguity about contract nonperformance and optimal insurance demand," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 938-954.
    7. Paul Heaton, 2017. "How Does Tort Law Affect Consumer Auto Insurance Costs?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(2), pages 691-715, June.

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