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

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  • A. Mitchell Polinsky
  • Steven Shavell

Abstract

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. In a basic case, the optimal subrogation provisions involve full retention by the insurer of the proceeds from a successful suit and the pursuit of all positive expected value suits. This eliminates litigation risks for insureds and results in lower premiums—financed by the litigation income of insurers, including from suits that insureds would not otherwise have brought. Moreover, optimal subrogation provisions are characterized in the presence of moral hazard, administrative costs, and non-monetary losses and it is demonstrated that optimal provisions entail sharing litigation proceeds with insureds in the first two cases but not when losses are non-monetary.

Suggested Citation

  • A. Mitchell Polinsky & Steven Shavell, 2017. "Subrogation and the Theory of Insurance When Suits Can Be Brought for Losses Suffered," NBER Working Papers 23303, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23303
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    References listed on IDEAS

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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, June.
    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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    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K13 - Law and Economics - - Basic Areas of Law - - - Tort Law and Product Liability; Forensic Economics
    • K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process

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