The Impact 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 to injured-third-parties the right to sue the injurer’s insurer for bad faith in claim settlement, expanding the set of eligible plaintiffs to those with the greatest incentive to sue. 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 resulting changes in observed insurance settlements. Estimates indicate a significant increase in compensation amounts with little evidence of an increase in fraud indications or a decrease in insurers’ fraud monitoring, among paid claims. Effects are modest, but 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 expanded bad faith liability.