Efficient liability law with costly insurance

This paper examines how insurance considerations should influence the design of liability rules, based on the realistic assumptions that individuals are risk-averse and that private insurance is costly. Empirical evidence indicates that insurance contracts often carry substantial loading factors—ranging from 30% to 40%—and that individuals display marked risk aversion when exposed to uncertain losses. These features have important normative implications for tort law. Under a negligence regime, risk aversion and costly insurance justify raising the standard of care. Under strict liability, the victim’s limited access to affordable insurance supports higher damage awards. The analysis advances the argument that courts should not evaluate precautionary behavior solely based on its expected harm reduction, but rather on its insurance value—namely, its capacity to protect risk-averse parties from uncertain losses.