The role of insurance in the adjudication of multiparty accidents

Abstract

This paper considers the case where adequate negligence standards cannot be defined because actions of defendants before an accident are imperfectly observable. Negligence-based liability rules, which are often considered as the only efficient liability rule in the presence of multiple tortfeasors, are not feasible in this environment. We propose an insurance-based liability rule as a remedy: Damages are apportioned according to the insurance policies of the defendants. The adjudication is made dependent on the requirement that the injurers have taken out insurance coverage setting the right incentives. The liability rule is easy to characterize, efficient, and avoids the use of punitive damages. Insurance-based liability could also be helpful to mitigate the problem of unobservable avoidance costs.