Economic Perspectives on the Restatement of the Law on Liability Insurance Project

Abstract

This paper provides perspectives on the Restatement of the Law, Liability Insurance (RLLI) project in view of theory and evidence on the economics of liability insurance and the operation and regulation of liability insurance markets. The RLLI project reflects prodigious effort by the Reporters over six years, and many revisions in response to feedback in the drafting process and the project’s evolution from Principles to Restatement. My focus is on the proposed black letter rules regarding insurers’ defense obligations and other issues that would expand policyholder rights compared with existing law in a significant number or even majority of jurisdictions. These proposed rules reflect an emphasis on the potential advantages to insureds facing legal actions of expanding their post-claim rights and protections, with relatively little attention paid to the potential impacts on insurance prices, coverage terms, and demand for coverage ex ante. Such proposals risk significant disruption of current law with uncertain, unintended, and adverse consequences on liability insurance markets in the form of higher prices, less availability of coverage, reductions in policy limits purchased, aggravation of the judgment proof problem, and increased adverse selection and moral hazard.