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Subrogation and the Theory of Insurance When Suits Can Be Brought for Losses Suffered

Listed author(s):
  • A. Mitchell Polinsky
  • Steven Shavell

The theory of insurance is considered here when an insured individual may be able to sue another party for the losses that the insured suffered—and thus when an insured has a potential source of compensation in addition to insurance coverage. Insurance policies reflect this possibility through so-called subrogation provisions that give insurers the right to step into the shoes of insureds and to bring suits against injurers. We show that subrogation provisions are a fundamental feature of optimal insurance contracts because they relieve litigation-related risks and result in lower premiums—financed by the litigation income of insurers. This income includes earnings from suits that insureds would not otherwise have brought. We also characterize optimal subrogation provisions in the presence of loading costs, moral hazard, and non-monetary losses.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23303.

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Date of creation: Mar 2017
Handle: RePEc:nbr:nberwo:23303
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  1. Rogerson, William P, 1985. "The First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 53(6), pages 1357-1367, November.
  2. Kenneth S. Reinker & David Rosenberg, 2007. "Unlimited Subrogation: Improving Medical Malpractice Liability by Allowing Insurers to Take Charge," The Journal of Legal Studies, University of Chicago Press, vol. 36(S2), pages 261-289, 06.
  3. Philip J. Cook & Daniel A. Graham, 1977. "The Demand for Insurance and Protection: The Case of Irreplaceable Commodities," The Quarterly Journal of Economics, Oxford University Press, vol. 91(1), pages 143-156.
  4. Viscusi, W Kip, 1989. "The Interaction between Product Liability and Workers' Compensation as Ex Post Remedies for Workplace Injuries," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 185-210, Spring.
  5. Gomez, Fernando & Penalva, Jose, 2015. "Tort reform and the theory of coordinating tort and insurance," International Review of Law and Economics, Elsevier, vol. 43(C), pages 83-97.
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