Center for Advanced Management

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Prof. Sharon Tennyson (Cornell University)


  • Datum: 07.07.2011
    17:00 - 18:30
    Schackstr. 4, Raum 307

Does the Threat of Insurer Liability for "Bad Faith" Affect Insurance Settlements?

This paper provides evidence on the long term impact of state rules that impose tort liability on first-party insurers for bad faith in claim settlements. Law and economics reasoning predicts that policyholders in states which recognize insurer bad faith as a tort should receive more favorable claim settlements, due to the greater potential damages insurers face in claims that are settled through the courts. We test this hypothesis using a large sample of automobile insurance claims for accidents occurring during 1972-1997, exploiting the variation in timing of states’ adoption of bad faith rules to identify the effect of bad faith liability on claim settlement amounts. We find that the presence of tort liability for insurer bad faith increases claim settlements relative to the claimed amount of loss, and reduces the likelihood that a claim is underpaid. We find no declines over time in the impact of tort bad faith on claim settlements. These results demonstrate that tort liability for insurer bad faith has real economic consequences for claim settlement outcomes.