The Economics of Liability Insurance

Abstract

Emphasizing general liability insurance, we describe basic relationships between legal liability law, liability insurance, and loss control, including the practical limitations of liability rules and insurance markets as mechanisms for promoting efficient deterrence and risk-spreading. After a brief introduction to the role of liability rules in providing incentives for loss control, we consider the implications of limited wealth and limited liability for the demand for liability insurance and accident deterrence. We then discuss the effects of correlated risk on liability insurance markets, the nature and causes of liability insurance contract disputes, causes of the U.S. tort liability/liability insurance crisis in the mid 1980s, and efficiency of the U.S. tort liability/liability insurance system.Keywordsliability insurancetort liabilitydeterrencelimited liabilityJEL Classification NumbersG22K13