abstract. The glaring gap in tort theory is its failure
to take adequate account of liability insurance. Much of tort theory fails to
recognize the active and central role that liability insurance plays in tort
law and litigation, or mentions liability insurance only briefly. Liability
insurance is treated as exogenous to tort law itself—as if it were merely a
contingent source of outside financing, like a bank that passively guarantees a
loan. It is no exaggeration to say that liability insurance played a defining and
(in our view) salutary role in creating modern tort liability. Modern tort
liability would not look at all as it does today if liability insurance had not
existed and influenced tort law’s development in the ways that it did.
This
Article calls upon tort scholars of all theoretical and methodological stripes
to address the significance of liability insurance by incorporating
consideration of liability insurance into their work. We first lay the
groundwork for understanding liability insurance’s significance by describing
the role that liability insurance plays in the life cycle of a tort claim,
sketching the contemporary incidence of liability insurance and commercial
self-insurance. We then provide a novel contribution to the tort law literature
by identifying a collection of important judicial opinions that have made
express reference to the availability (or unavailability) of liability
insurance in precedent-setting, liability-expanding, and liability-limiting
tort cases. We further identify the ways that liability insurance historically
has influenced, and continues to influence, the shape and scope of tort law. We
specifically identify a number of significant tort law doctrines and practices,
such as the thin-skull rule, that we argue would never have persisted in the
absence of liability insurance. Given this evidence, we argue that it is
liability insurers who—paradoxically—have fueled the continuing expansion of
American tort liability that began more than a century ago.
We then
examine modern tort theory, much of which fails to take adequate account of
liability insurance. We explain how to begin filling the gap in tort theory
that results from omitting consideration of or inadequately considering
liability insurance, showing how liability insurance can appropriately figure
in both deontic and consequentialist theories of tort liability. Only by
greater recognition and candid acknowledgment of the role that liability
insurance plays in tort cases can tort theory provide an accurate picture of
the field that it seeks to describe.
Finally,
we offer lessons for the courts, calling not only for more open acknowledgment
of the significance of liability insurance in judicial opinions but also for a
radical change in trial practice by proposing that judges explicitly consider
record evidence (including the availability of liability insurance) on the
insurability of the risk at issue in tort cases.
authors. Kenneth S. Abraham is David and Mary Harrison
Distinguished Professor of Law, University of Virginia School of Law; Catherine
M. Sharkey is Segal Family Professor of Regulatory Law and Policy, New York
University School of Law. Jonathan Arone (NYU 2024),
David Leynov (NYU 2024), Anna Lifsec
(NYU 2025), and Ethan Young (Virginia 2024) provided excellent research
assistance. We presented a draft of this Article at the NYC Tort Theory
Workshop, the NYU Law Faculty Workshop, and the Yale Private Law Colloquium,
where we received helpful feedback. We are also grateful to Tom Baker, Anita
Bernstein, Vincent Blasi, Jonathan Cardi, Martha Chamallas,
Nora Freeman Engstrom, Mark Geistfeld, John C.P. Goldberg,
Moshe Halbertal, Daniel Hemel,
Gregory Keating, Leslie Kendrick, Alexandra Lahav, Ariel Porat,
Robert L. Rabin, Ketan Ramakrishnan, Arthur Ripstein, Daniel Schwarcz, Anthony Sebok, Gregg
Strauss, and Benjamin C. Zipursky for insightful comments.
Introduction
We can take the mystery out of the matter right away. The
glaring gap in tort theory
is its failure to take adequate account of liability insurance. Although
liability insurance plays a substantial role in the life cycle of tort claims,
it does not feature prominently in any leading tort theory. Liability insurance
not only influences judicial decisions about whether and when there should be
liability—as courts have recognized for decades, some openly and some only
implicitly—but also influences the tort system in other ways that tort theory
has barely recognized.
By our estimate, liability insurance pays as much as eighty
to eighty-five percent of all tort damages. Yet given that most academic
discussions of tort theory make little or no reference to liability insurance,
much tort theory is either unaware that liability insurance pays most tort
claims, or, apparently, considers this fact largely irrelevant. Other tort
theory makes reference to liability insurance, but does so without rigorously
examining the many ways in which liability insurance influences tort liability,
beyond being a mere source of funding.
Just as importantly, much of the torts
literature also has failed to recognize how liability insurance and liability
insurers actively influence the course and dynamics of tort litigation—both
before a tort claim is made, and throughout the course of subsequent
litigation. Then, after trial, liability insurers decide whether to take
appeals on behalf of their policyholders and whether to fight appeals by
plaintiffs who have lost at trial. Liability insurers thus decide when to take
the risk that plaintiffs will make new law on appeal that expands liability.
And liability insurers have been playing this role and having this kind of
influence for more than a century. Thus, the role of insurers goes far beyond
the simplistic idea that liability insurance is just a source of funds
available only after a tort claim has been resolved. In short, both quantitatively and
qualitatively, liability insurance has always had a fundamental influence on
the shape and scope of tort liability.
Yet much of tort theory has little or nothing to say about
liability insurance. For example, Professors John Goldberg
and Benjamin Zipursky, two of the most prominent tort theorists writing today,
devote less than two pages to discussion of liability insurance in their book
about civil recourse theory. Professor Gregory Keating’s most
recent book on tort theory also mentions liability insurance only briefly and
engages in almost no analysis of its current or historical role in the tort
system. Even when tort theorists mention
liability insurance, often it is mentioned only briefly and treated as
exogenous to tort law itself, as if liability insurance were merely a
contingent source of outside financing. This approach views liability
insurance like a bank that passively guarantees a loan rather than what it is
in reality: an active and, often, arguably the most important ingredient of,
and influence on, tort liability itself.
The stakes here are significant. Positive tort law theories
aim to provide as complete a picture as possible of what tort law and tort
liability are. Therefore, these theories should provide an account of the role
played by liability insurance. Without accounting for liability insurance, a
positive tort theory is incomplete and therefore inaccurate. And to the extent
that a normative tort theory envisions what the scope and nature of tort
liability should be, then omitting the role that liability insurance will play
in that vision will render the theory unrealistic. For the courts and for the
tort system, the doctrinal evolution of tort law is at stake. The issue is
whether courts will address new risks by routinely considering the insurability
of liability for those risks, as many, but not all, courts, have long done.
It is possible to differ about how much some of the torts literature recognizes the existence and influence of
liability insurance, and how much does not. Suffice it to say that, for the most
part, liability insurance stays in the background of much tort theory, and that
analysis of liability insurance does not figure in an important way in any
contemporary tort theory. Our point is that liability insurance should be much
more frequently and extensively in the foreground of tort theory. We therefore
aim to show how liability insurance figures in tort liability, and why it
should be an important and characteristic ingredient of any theory of tort
liability that attempts to account for tort liability as it actually exists, or
how tort law became what it is now. We use the term “ingredient” in reference
to liability insurance’s role in tort law because the analogy to a recipe fits
almost perfectly. For example, “cake” is made
with flour. There is such a thing as what is sometimes called “flourless cake,”
but it is an unusual version, arguably even an imitation, of cake. Its very
name emphasizes the absence of one of the characteristic ingredients of “cake.” Similarly, mortgage
financing is not a formally necessary feature of home ownership in the United
States. It is logically possible to own a home without financing its purchase
through a mortgage loan. But eighty percent of homebuyers finance their
purchases with mortgage loans.
To describe the nature of homeownership in the United States without reference
to mortgages would be to provide a fundamentally incomplete and misleading
portrait of this phenomenon. So it is with
contemporary tort liability. Liability insurance is a characteristic ingredient
that is central to tort liability.
In addition, it is no exaggeration to say that liability
insurance played a defining role in creating modern tort liability, and that
modern tort liability would not look at all like it looks today if liability
insurance had not existed and influenced tort liability’s development in the ways
that did. To the extent that tort law is a “law
of wrongs,” as Professors Goldberg and Zipursky insist, it might still be a law of
wrongs if liability insurance had never existed, but it would not be the law of
wrongs in contemporary tort law. The wrongs would be different, and the law
governing them would be different, because the way the courts think about what
should count as a tortious wrong has been influenced by the presence and
availability of liability insurance. And to the extent that tort law is
concerned with creating incentives and deterring harmful conduct, as prominent
consequentialist tort theorists (including one of us) have argued, tort law would have a different
shape as well, because liability insurance has always employed important
methods of achieving these goals, including risk-based pricing. For these reasons, this Article aims
to demonstrate the ways in which liability insurance should be included in
accurate and meaningful theories of tort law, whatever they are.
We appreciate the fact that some tort theorists may not
address liability insurance because they are sometimes addressing the narrow
question of what comprises the logical, normative structure of tort law. Liability insurance is excluded from
this structure, apparently, because it is possible to conceive of tort law
rules as they are stated in judicial opinions and treatises without reference
to liability insurance. Even so, the plethora of tort
cases—from state and federal courts across myriad jurisdictions—in which judges
explicitly mention insurance as relevant to their doctrinal determinations
challenges this framing.
That said, if the goal of these tort theorists is to identify some abstract
essence of tort law, analogous to the Platonic essence of cake or home
ownership, we have little to say relevant to that form of theorizing. What matters to us here is
the way in which liability insurance is, in a very real sense, a characteristic
ingredient of most tort liability as we know it today, discussed explicitly by
courts in key doctrinal disputes, and often an unacknowledged ingredient of the
rules that courts adopt.
In our view, the role played by liability insurance in tort
has been and continues to be beneficial. Liability insurance spreads the risk
of tort liability, often helps to promote safety, ensures compensation for some
tort victims who would otherwise not be compensated, and enables planning and
budgeting that would require reserving or encumbering of assets if liability
insurance could not be relied on by potential defendants to fund tort
liability. The insurance-facilitated expansion of tort liability has been a
byproduct of liability insurance’s characteristics. But our project is mainly
positive and descriptive with regard to liability insurance, albeit designed to
spur its incorporation and elaboration in descriptive and normative tort
theories.
Our analysis proceeds in four parts. Part I is largely
concerned with the scope and nature of the liability insurance that covers the
parties and potential parties to tort suits. This Part lays the groundwork for
our analysis by describing the role that liability insurance plays in the life
cycle of a tort claim, sketching the contemporary incidence of liability
insurance and commercial self-insurance, and estimating that liability
insurance pays as much as eighty to eighty-five percent of all tort costs.
Part II turns from the parties and their liability insurance
to the courts and tort law doctrine. Part II highlights liability insurance’s
central role in developing tort doctrine. It opens with an extended sampling of
significant judicial opinions chosen for expressly referencing the availability
(or unavailability) of liability insurance and being precedent-setting,
liability-expanding, or liability-limiting tort cases. It then identifies and
analyzes the ways that liability insurance historically has influenced, and
continues to influence, the shape and scope of tort law, singling out important
tort law doctrines that would never have persisted in the absence of liability
insurance. Part II concludes by demonstrating how, through the exercise of
their duty to defend their policyholders and their right and duty to settle
claims under their policies, liability insurers have long been and continue to
be the real parties in interest in the vast majority of tort suits. We argue
further that, paradoxically, through their effort to combat tort liability in
individual lawsuits, liability insurers have fueled the expansion of American
tort liability that began over a century ago.
Parts III and IV move beyond the descriptions in the first
two Parts to offer an original critique, and opportunities for reform, of tort
theory. Part III establishes that existing tort theories fail to capture the influence
of liability insurance discussed in Parts I and II. Part III then begins to
fill the resulting gap in tort theory. Specifically, Part III shows how
liability insurance can present challenges to, and appropriately figure into,
both deontic and consequentialist theories of tort liability. We attempt to
explain how deontic theories could integrate liability insurance into their
frameworks, though we see our effort mainly as a challenge to deontic theorists
either to accept or to explain the reasons for their rejection of our
contentions. Turning to consequentialist theories, we focus on the interaction
between liability insurance and the deterrent aims of tort liability. We
suggest the ways in which, despite the moral hazard that liability insurance creates,
liability insurance and deterrence can fruitfully coexist and even prove
synergistic.
Finally, in view of our contention that accounting for
liability insurance is consistent with both deontic and consequentialist tort
theories, Part IV offers lessons for the courts to follow in taking liability
insurance into account, whether they are operating under deontic or
consequentialist assumptions. It begins with some thoughts about the reasons
courts historically have been more reticent in their opinions about
acknowledging the influence of liability insurance than we believe they ought
to be. We call not only for more open acknowledgment of this influence in
judicial opinions but also for holding that evidence of market availability of
the form of insurance that would cover the form of tort liability at issue is
admissible as an addition to the record, though not brought to a jury’s
attention. This change will be regarded by some as revolutionary, but in fact
it would simply make formally available to the courts what they often consider
informally and outside the evidentiary process. Indeed, it is a matter of
common sense that something as important and influential as the insurability of
the risk at issue in a tort case be part of the record in that case rather than
being a matter of speculation or assumption, as it has been in some of the
cases we canvass. This Part then examines the considerations that affect
whether the courts should expect liability insurance against potential new
forms of liability to develop. The core lessons are that a new form of
liability must either fall into a preexisting category of insurance coverage or
generate sufficient demand for insurance to warrant the costs entailed in
creating insurance to cover it. In addition, moral hazard and informational
uncertainty considerations also may play a role in influencing the liability
insurance market.