Empirical Analysis of Expanding Insurers' Duty to Settle: Evidence from the Royal Globe Doctrine

Abstract

The historic 1979 California Supreme Court decision in Royal Globe Insurance Company v. Superior Court unexpectedly extended insurer’s good faith duty to settle liability claims to the injured third party claimant, expanding the set of eligible plaintiffs to those with the greatest incentive to sue. Theory predicts two competing effects of this expansion: an increase in insurers’ incentives to pay legitimate claims, and a corresponding decrease in insurers’ incentives to investigate potentially fraudulent claims. Using data on automobile bodily injury liability claims, we make use of the quasi-experimental nature of this decision and employ synthetic control methods to examine the relative importance of these two effects. Estimates indicate a significant increase in compensation amounts but little evidence of an increase in fraud indications or a decrease in insurers’ fraud monitoring, among paid claims. Significant differences in treatment effects are found for claims of different sizes and characters, with small claims and claims without fraud suspicion indicators receiving more beneficial treatment under the expanded duty to settle.