The Effect of Bankruptcy Exemptions on Medical Malpractice Insurance Limits

Abstract

Recent work using Texas closed claim data finds that physicians are rarely required to use personal assets in medical malpractice settlements even when plaintiffs secure judgments above the physician's insurance limits. In equilibrium, this should lead physicians to purchase less insurance. Qualitative research on the behavior of plaintiffs suggests that there is a norm under which plaintiffs agree not to pursue personal assets as long as defendants are not grossly underinsured. This norm operates as a soft constraint on physicians. All other things equal, while physicians want to lower their coverage, they do not want to violate the norm and trigger an attack on their personal assets. This constraint should be less effective when physicians have other ways to shield their assets. Using data from a national medical malpractice insurer, we show that doctors in states with more generous bankruptcy exemptions have systematically lower insurance limits. These results are supported in two other national datasets that cover multiple insurers. Among other things, these results suggest that the large haircuts and low insurance limits observed in the Texas data may not generalize to jurisdictions that do not have Texas's generous bankruptcy provisions.