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Deterring Fraud: The Role of General Damage Awards in Automobile Insurance Settlements

  • David S. Loughran
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    Awards for pain and suffering and other noneconomic losses account for over half of all damages awarded under third-party auto insurance bodily injury settlements. This article hypothesizes that third-party insurers use general damage awards to reduce the incentive to submit exaggerated claims for specific damages for injuries and lost wages. Consistent with this hypothesis, the article finds evidence using data on over 17,000 closed bodily injury claims that special damage claims that exceed their expected value receive proportionally lower general damage awards than claims that do not. Among the implications of this research is the possibility that insurers will be less zealous in challenging fraudulent special damage claims under a third-party insurance regime than they will be under a first-party insurance regime in which access to general damages is limited. Copyright The Journal of Risk and Insurance.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1539-6975.2005.00138.x
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    Article provided by The American Risk and Insurance Association in its journal The Journal of Risk and Insurance.

    Volume (Year): 72 (2005)
    Issue (Month): 4 ()
    Pages: 551-575

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    Handle: RePEc:bla:jrinsu:v:72:y:2005:i:4:p:551-575
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    1. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    2. Tennyson, Sharon, 1997. "Economic institutions and individual ethics: A study of consumer attitudes toward insurance fraud," Journal of Economic Behavior & Organization, Elsevier, vol. 32(2), pages 247-265, February.
    3. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
    4. Bond, Eric W. & Crocker, Keith J., 1997. "Hardball and the soft touch: The economics of optimal insurance contracts with costly state verification and endogenous monitoring costs," Journal of Public Economics, Elsevier, vol. 63(2), pages 239-264, January.
    5. Crocker, Keith J & Tennyson, Sharon, 2002. "Insurance Fraud and Optimal Claims Settlement Strategies," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 469-507, October.
    6. Pierre Picard, 2012. "Economic Analysis of Insurance Fraud," Working Papers hal-00725561, HAL.
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