Insurance and Tort: Coordination Systems and Imperfect Liability Rules

Three methods compete, both across and within different legal systems, for coordinating insurance or like benefits (social security, employer provided benefits, etc.) and Tort liability awards:

Collateral Source Rule

(cumulation), collateral benefits offset (deduction), and subrogation of insurer or provider. It is known in the economics literature that the optimal insurance contract contains subrogatory provisions (

Shavell 1987

,

Sykes 2001

). In the presence of a liability system, however, it has been overlooked that subrogation and its alternatives, however, make sense only in a world in which liability rules don’t operate perfectly. Under an imperfect strict liability regime, solely subrogation can induce optimal incentives for risk coverage. In addition, collateral offset reduces, compared to the other two alternative regimes, injurer’s incentives to take care. Under an uncertain negligence rule incorporating causation subrogation still outperforms the other regimes, and especially the benefits deduction rule. Finally, the paper also discusses in informal terms the apparently strong advantage in terms of administrative costs of the collateral offset over subrogation, and points out at several factors that might seriously undermine this opinion. The paper casts doubts upon the trend favoring the elimination of the Collateral Source Rule and adoption of deduction systems, which has already been shown empirically to reduce deterrence (

Rubin and Shepherd 2007

).