395. David Rosenberg, Deregulating Insurance Subrogation: Towards an Ex ante Market in Tort Claims, 12/2002.
Abstract: This essay analyzes the benefits of a tort system in which commercial and governmental first-party insurers acquire complete ownership and control over the prosecution and proceeds of their insureds' prospective tort claims. Under the regime of unlimited subrogation ("US"), insurers would treat tortious injury like any other covered risk thus paying an insured only for pecuniary loss (e.g., medical costs, lost income, etc.) according to standard policy (or program) terms. In return, insureds would receive payment in the form of reduced premiums (or taxes) or other financial benefits, equaling the aggregate average amount the insurer expects to recover in tort damages. US would replace the governing common law and statutory bars against insurers taking a subrogation or assignment interest beyond the amount that would reimburse them for payments made or promised the inured. In particular, US would allow subrogation of personal injury claims in full, including the potential recovery of non-pecuniary, punitive, and other damages in excess of the insurance benefits received by the insured.
Allowing insureds to transfer ownership of potential tort claims to first-party insurers will directly improve insureds' welfare on three dimensions:
- Insurance: Reducing insurance premiums not only makes risk averse individuals wealthier in their uninjured condition, but also negates the compulsory "premium" (pass-through) they pay to prospective defendants through adjusted product- and labor-prices for unwanted "tort insurance" against non-pecuniary harm.
- Deterrence: Tort liability promotes deterrence goals, including through price effects, without need for compromising insurance goals; indeed, law enforcement will be enhanced by harnessing the litigation advantages of first-party insurers: risk-neutrality, scale economies, and the investment incentives of outright ownership of tort claims.
- Administrative Productivity: Processing of tort claims would be streamlined-with insurers also serving as mass tort class action representatives-reducing costs not only on plaintiffs' side but also for defendants and the courts.
In the long-term, there is the promise of three broader benefits. First, first-party insurer ownership of potential tort claims could catalyze an ex ante claims-market, in which consortia of lawyers and other investors would compete against insurers to purchase and prosecute prospective tort claims. Competitive ex ante claims markets (including secondary markets for claim re-sale and aggregation) provide the most efficient and effective means of achieving the deterrence ends of tort liability and generating the highest clearing price for sellers of potential tort claims. Second, the emergent ex ante claims market would establish both incentives and framework for first-party and liability insurers (joined by potential business defendants) to effect substantive and procedural tort reforms by contract. Finally, by rendering the tort system more efficient, the ex ante claims market would set the stage for legislatures to enact discretely targeted, theoretically sound reforms.