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Bad Debt Loss Insurance in Settlement and Litigation

Author

Listed:
  • Kirstein Annette

    (University of Karlsruhe Otto-von-Guericke University, Magdeburg Saarland University)

  • Kirstein Roland

    (University of Karlsruhe Otto-von-Guericke University, Magdeburg Saarland University)

  • Gerhard Hans

    (University of Karlsruhe Otto-von-Guericke University, Magdeburg Saarland University)

Abstract

We analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A success in a settlement or trial can turn into a disaster when the defendant goes bankrupt before paying the plaintiff's claim. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant's bankruptcy, and of buying Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance have different impacts on the predicted outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, has the opposite effect, as it decreases the settlement result.

Suggested Citation

  • Kirstein Annette & Kirstein Roland & Gerhard Hans, 2010. "Bad Debt Loss Insurance in Settlement and Litigation," Review of Law & Economics, De Gruyter, vol. 6(1), pages 107-124, May.
    • Handle: RePEc:bpj:rlecon:v:6:y:2010:i:1:n:5
    DOI: 10.2202/1555-5879.1383
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    References listed on IDEAS

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