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Monthly Archives: October 2012

Insurance as Safety Regulator

Omri Ben-Shahar & Kyle D. Logue, Outsourcing Regulation: How Insurance Reduces Moral Hazard, 111 Mich. L. Rev. (forthcoming 2012) available at SSRN.

In Outsourcing Regulation: How Insurance Reduces Moral Hazard, Omri Ben-Shahar and Kyle Logue make a pitch for the underappreciated role of insurance as manager and minimizer of safety risks.

The study of tort law in the modern administrative state increasingly entails a comparative institutional account of private common law versus public agency control in terms of satisfying the goals of compensation and regulation of safety risks.  I would go so far as to say that the future of tort law and scholarship belongs to those who tackle complex health and safety issues by integrating concepts and doctrines drawn from public administrative law and private tort law.  Ben-Shahar and Logue make a major contribution by adding the third dimension of insurance: “Choosing the ideal regulatory role of these two institutions—agencies versus courts—depends on how well insurance arrangements support the regulatory function of tort and agency law.” (P.20)

In the contest between institutions, Ben-Shahar and Logue boldly pronounce insurance the winner: “[I]n a variety of areas private insurance companies can, and already do, replace or augment the standard-setting and safety-monitoring currently performed by government, and they do so in ways that increase overall social welfare.” (P.1)  As their title suggests, they are ready to “outsource” to the private insurance market regulatory functions now performed by the government.

Why?  According to Ben-Shahar and Logue, private insurance companies enjoy two main comparative advantages: superior information and competition.  In terms of informational advantages, insurance companies have “expertise in acquiring and sorting sophisticated information.”  (P.12)  Central to their business is the assembly of large actuarial databases used to classify and price risks in the underwriting process.  Moreover, unlike government regulators, insurance companies are subject to competition, which is key to their motivation to reduce risks.

Ben-Shahar and Logue want to upend conventional thinking about insurance as merely providing indemnity for losses.  They stand on the shoulders of several insurance law scholars (notably Ken Abraham, Ronen Avraham, Tom Baker, and Steven Shavell) to present an overarching view of insurance as a pervasive form of regulation in the modern economy.  They present a detailed, clear picture of insurers engaging in various forms of ex ante and ex post regulation.  Unlike most government regulators, insurers present actors with a menu of safety options, not simply an either-or choice.  Insurers tailor and adjust insurance premiums according to policyholders’ risk characteristics and loss experiences over time, setting prices for actors’ choices or levels of care much like government-set Pigouvian taxes.  Employing a centralized network of agents who administer claims, insurance transforms vague safety standards into bright-line rules.  And finally, insurers monitor the conduct of their policyholders on an ongoing basis.  Ben-Shahar and Logue give myriad examples of how insurance supplies “both the incentive and the know-how that actors often lack, to administer a more efficient level of accidents” (p. 2), moving seamlessly from the world of “what is”—with examples of risk management in the homeowners, auto, and products liability insurance contexts—to the world of “what could be”—imagining insurance as a substitute for government regulation in consumer protection, food and import safety, and financial markets.

Ben-Shahar and Logue’s article bursts with fresh insights.  One of their most fascinating ideas is a kind of “law of conservation of regulation.”  Namely, if tort-based liability is eliminated in a certain area and the government has yet to step in, then private insurance markets will spring up.  For example, they predict: “It is possible . . . that the trend in American law, of businesses immunizing against court-imposed liability for breach of consumer product contracts, through their use of mandatory arbitration clauses, may dramatically increase the demand for first-party insurance coverage as a substitute for legal control of consumer product quality.” (P.48)  Another provocative idea is that subrogation claims brought by first-party insurers can substitute for class-action lawsuits as a means of regulating bad behavior where individualized lawsuits are not cost effective. (P.46)

In a recent article, Ken Abraham divided the field of insurance law into “Four Conceptions of Insurance,” each of which “paints a different view of the cathedral.” (P.56)  Ben-Shahar and Logue’s work falls squarely within the “governance” conception, which Abraham describes with the catchphrase “insurance as ‘surrogate’ for government.” (P.5)  (The competing conceptions are insurance as contract, public utility, or product.)  Reading Ben-Shahar and Logue’s article against the backdrop of Abraham’s typology, the reader may wonder, “Where are we most likely to see insurance wear its risk manager hat?”  “Where not?”  The risk management role played by insurance is likely to vary significantly by insurance line and by market conditions.  Ben-Shahar and Logue offer a formidable start down this path. To their credit, the authors make bold predictions and do not shy away from claims that still await empirical testing.  But, for the time being, if their conceptual claims hold sway, then we might welcome, rather than fear, insurers’ larger role in the health and safety contexts of the modern administrative state.

Cite as: Catherine Sharkey, Insurance as Safety Regulator, JOTWELL (October 9, 2012) (reviewing Omri Ben-Shahar & Kyle D. Logue, Outsourcing Regulation: How Insurance Reduces Moral Hazard, 111 Mich. L. Rev. (forthcoming 2012) available at SSRN),

Meet the Editors

Torts Section Editors

The Section Editors choose the Contributing Editors and exercise editorial control over their section. In addition, each Section Editor will write at least one contribution (“jot”) per year. Questions about contributing to a section ought usually to be addressed to the section editors.

Professor Gregory Keating
William T. Dalessi Professor of Law and Philosophy
USC Gould School of Law

Professor Catherine Sharkey
Crystal Eastman Professor of Law
New York University School of Law

Contributing Editors

Contributing Editors agree to write at least one jot for Jotwell each year.

Professor Ellen Bublick
Dan B. Dobbs Professor of Law
University of Arizona, James E. Rogers College of Law

Professor Martha Chamallas
Robert J. Lynn Chair in Law
The Ohio State University, Moritz College of Law

Professor Nora Engstrom
Stanford Law School

Professor Mark Geistfeld
Sheila Lubetsky Birnbaum Professor of Civil Litigation
New York University School of Law

Professor John Goldberg
Eli Goldston Professor of Law
Harvard Law School

Professor Scott Hershovitz
University of Michigan Law School

Professor Keith Hylton
Honorable Paul J. Liacos Professor of Law
Boston University School of Law

Professor Sheila Scheuerman
Director of Faculty Development & Scholarship
Charleston School of Law

Professor Anthony Sebok
Benjamin Cardozo School of Law

Professor Benjamin C. Zipursky
Associate Dean for Research
James H. Quinn Professor
Fordham University School of Law

Call For Papers

Jotwell: The Journal of Things We Like (Lots) seeks short reviews of (very) recent scholarship related to the law that the reviewer likes and thinks deserves a wide audience. The ideal Jotwell review will not merely celebrate scholarly achievement, but situate it in the context of other scholarship in a manner that explains to both specialists and non-specialists why the work is important.

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Jotwell Mission Statement

The Journal of Things We Like (Lots)–JOTWELL–invites you to join us in filling a telling gap in legal scholarship by creating a space where legal academics can go to identify, celebrate, and discuss the best new legal scholarship. Currently there are about 350 law reviews in North America, not to mention relevant journals in related disciplines, foreign publications, and new online pre-print services such as SSRN and BePress. Never in legal publishing have so many written so much, and never has it been harder to figure out what to read, both inside and especially outside one’s own specialization. Perhaps if legal academics were more given to writing (and valuing) review essays, this problem would be less serious. But that is not, in the main, our style.

We in the legal academy value originality. We celebrate the new. And, whether we admit it or not, we also value incisiveness. An essay deconstructing, distinguishing, or even dismembering another’s theory is much more likely to be published, not to mention valued, than one which focuses mainly on praising the work of others. Books may be reviewed, but articles are responded to; and any writer of a response understands that his job is to do more than simply agree.

Most of us are able to keep abreast of our fields, but it is increasingly hard to know what we should be reading in related areas. It is nearly impossible to situate oneself in other fields that may be of interest but cannot be the major focus of our attention.

A small number of major law journals once served as the gatekeepers of legitimacy and, in so doing, signaled what was important. To be published in Harvard or Yale or other comparable journals was to enjoy an imprimatur that commanded attention; to read, or at least scan, those journals was due diligence that one was keeping up with developments in legal thinking and theory. The elite journals still have importance – something in Harvard is likely to get it and its author noticed. However, a focus on those few most-cited journals alone was never enough, and it certainly is not adequate today. Great articles appear in relatively obscure places. (And odd things sometimes find their way into major journals.) Plus, legal publishing has been both fragmented and democratized: specialty journals, faculty peer reviewed journals, interdisciplinary journals, all now play important roles in the intellectual ecology.

The Michigan Law Review publishes a useful annual review of new law books, but there’s nothing comparable for legal articles, some of which are almost as long as books (or are future books). Today, new intermediaries, notably subject-oriented legal blogs, provide useful if sometimes erratic notices and observations regarding the very latest scholarship. But there’s still a gap: other than asking the right person, there’s no easy and obvious way to find out what’s new, important, and interesting in most areas of the law.

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