The Impact of Insurance - Feb. 15

Question 1

What is insurance? (Feldman)

Answer 1

Insurance is “a device for reducing risk by combining a sufficient number of exposure units [e.g., wood frame houses exposed to risks of fire] to make their individual losses collectively predictable. The predictable loss is then shared proportionately by all units in the combination.” (727)

Question 2

How many kinds of insurance are there? (Feldman)

Answer 2

Two.

Question 3

What are the kinds of insurance? (Feldman)

Answer 3

Loss insurance and liability insurance.

Question 4

What is loss insurance? (Feldman)

Answer 4

Loss insurance – also called first-party insurance – pays you back directly for actual damages that you suffer.

Question 5

What is liability insurance? (Feldman)

Answer 5

Liability insurance – also called third-party actor insurance – pays back others for harms you cause them.

Question 6

When are risks insurable? (Feldman)

Answer 6

Risks are insurable when there are enough risk impositions to satisfy the law of large numbers.

Question 7

What are the five main limits of the law of large numbers? (Feldman)

Answer 7

1. A large group of homogenous exposure units;
2. Accidental, as opposed to intentional, loss;
3. Economically feasible cost (e.g., the cost of issuing life insurance to a 99-yearold is too high because the probability of death is too high);
4. Calculable chance of loss (statistics or some basis for estimation); and
5. Non-correlation of losses (e.g., earthquakes are difficult to insure because they inflict highly correlated losses).

Question 8

What is moral hazard? (Feldman)

Answer 8

Moral hazard is the tendency of insurance to induce intentional, wrongful acts designed to recover under the policy (e.g., fire insurance can increase the incidence of arson).

Question 9

What is morale hazard? (Feldman)

Answer 9

Morale hazard is the tendency of insurance to induce indifference to loss or relaxation of vigilance against loss (e.g., fire insurance can lead to less vigilance in guarding against a fire).

Question 10

What are some ways to mitigate moral and morale hazards? (Feldman)

Answer 10

Premium pricing differentials, exclusions, deductibles, and co-payments are various ways of attempting to mitigate moral and morale hazard.

Question 11

Is it possible to accurately measure the risk an actor creates in a given time period? (Feldman)

Answer 11

The theoretical ideal is to measure the risk an actor creates in a given time period, but doing so accurately is not possible because of infrequency of harm
and variable conduct.

Question 12

When is deterrence pressure on a large actor high? (Feldman)

Answer 12

Deterrence pressure on a large actor is high if the actor self-insures or if insurance rates are determined solely by the actor’s own experience.

Question 13

What is a large actor? (Feldman)

Answer 13

Hospitals, trucking companies, etc.

Question 14

What is a small actor? (Feldman)

Answer 14

An individual doctor, a truck driver, etc.

Question 15

How may insurance pressure be dissipated from small actors? (Feldman)

Answer 15

Where insurance rates are determined based on
past experience and class rating, deterrence pressure may be dissipated.

Question 16

How is negligence liability under the proximate cause doctrine determined? (Feldman)

Answer 16

The extent of liability under proximate cause doctrine may depend on whether the injurer or the victim is the “best loss-spreader,” and insurance considerations may determine which of the two is the “best loss-spreader.” Sometimes victims may be better able to spread losses by purchasing loss insurance (Ryan). Other times the injurer may be better able to spread losses by purchasing liability insurance (Petition of Kinsman Transit). Other things equal, insurance tends
to expand the scope of negligence liability.

Question 17

What is enterprise liability? (Feldman)

Answer 17

One form of strict liability – enterprise liability – supposes that enterprises should internalize the costs of the accidents they cause and disperse those
costs across all those who make up the enterprise. It assumes, in other words, that enterprises should either self-insure or purchase liability insurance.

Question 18

What happens with insurance under vicarious liability law? (Feldman)

Answer 18

Under vicarious liability law, employers (sometimes referred to as “masters”) insure their employees (sometimes referred to as “servants”) against tort
liability for torts they commit in the course of their employment.

Question 19

What happens for self-insured actors under vicarious liability law? (Feldman)

Answer 19

For self-insured actors, vicarious liability creates a large and homogeneous risk pool and incentivizes employers/masters to ensure that others are not harmed by their employees/servants.

Question 20

What is the collateral source rule? (Feldman)

Answer 20

The collateral source rule holds “that if an injured party receives some compensation for [their] injuries from a source wholly independent of the tortfeasor, such payment should not be deducted from the damages which plaintiff would otherwise collect
from the tortfeasor.” (760-61)

Question 21

What is the policy behind the collateral source rule? (Feldman)

Answer 21

“The collateral source rule expresses a policy judgment in favor of encouraging citizens to purchase and maintain insurance for personal injuries and for other
eventualities. … If we were to permit a tortfeasor to mitigate damages with payments from plaintiff’s insurance, plaintiff would be in a position inferior to that of having bought no insurance, because [the] payment of premiums would have earned no
benefit.” (761-62)

Question 22

How do fairness considerations support the collateral source rule? (Feldman)

Answer 22

The rule prevents a wrongdoer from using the wrongful injury of a victim as a justification for appropriating some of the plaintiff’s financial resources.