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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 defendants 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
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    References listed on IDEAS

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    1. Rubinstein, Ariel, 1982. "Perfect Equilibrium in a Bargaining Model," Econometrica, Econometric Society, vol. 50(1), pages 97-109, January.
    2. Kathryn E. Spier, 1994. "Pretrial Bargaining and the Design of Fee-Shifting Rules," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 197-214, Summer.
    3. Lucian Arye Bebchuk, 1984. "Litigation and Settlement under Imperfect Information," RAND Journal of Economics, The RAND Corporation, vol. 15(3), pages 404-415, Autumn.
    4. Mathias Dewatripont, 1988. "Commitment Through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 377-390.
    5. S. Hun Seog, 2006. "Strategic Demand for Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(2), pages 279-295.
    6. Putnam, Robert D., 1988. "Diplomacy and domestic politics: the logic of two-level games," International Organization, Cambridge University Press, vol. 42(03), pages 427-460, June.
    7. Mathias Dewatripont, 1988. "Commitment through renegotiation-proof contacts with third parties," ULB Institutional Repository 2013/9569, ULB -- Universite Libre de Bruxelles.
    8. Roland Kirstein, 2000. "Risk Neutrality and Strategic Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(2), pages 251-261, April.
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