Abstract
This paper examines how insurance considerations should infuence the design
of liability rules, based on the realistic assumptions that individuals are risk-averse
and that private insurance is costly. Empirical evidence indicates that insurance
contracts often carry substantial loading factors - ranging from 30% to 40%- and
that individuals display marked risk aversion when exposed to uncertain losses.
These features have important normative implications for tort law. Under a
negligence regime, risk aversion and costly insurance justify raising the standard
of care. Under strict liability, the victim's limited access to a¤ordable insurance
supports higher damage awards. The analysis advances the argument that courts
should not evaluate precautionary behavior solely based on its expected harm
reduction, but rather on its insurance value namely, its capacity to protect risk-
averse parties from uncertain losses.
of liability rules, based on the realistic assumptions that individuals are risk-averse
and that private insurance is costly. Empirical evidence indicates that insurance
contracts often carry substantial loading factors - ranging from 30% to 40%- and
that individuals display marked risk aversion when exposed to uncertain losses.
These features have important normative implications for tort law. Under a
negligence regime, risk aversion and costly insurance justify raising the standard
of care. Under strict liability, the victim's limited access to a¤ordable insurance
supports higher damage awards. The analysis advances the argument that courts
should not evaluate precautionary behavior solely based on its expected harm
reduction, but rather on its insurance value namely, its capacity to protect risk-
averse parties from uncertain losses.