Torts - Cases, Principles, and Institutions Fifth Edition, 2016a

Witt & Tani, TCPI 4. Negligence Standard
Evidence from other areas has been modest and mixed, but still indicates some deterrent
effect. For example, a leading study by Alma Cohen and Rajeev Dehejia found that transitions to
no-fault auto liability (and away from tort) led to a 6% increase in traffic-related deaths in the
United States. Alma Cohen & Rajeev Dehejia, The Effect of Automobile Insurance and Accident
Liability Laws on Traffic Fatalities, 47 J. L. & ECON. 357 (2004). Other studies in the same area
have been more equivocal, but the methodological obstacles are considerable.
4. Cost-benefit in practice (II): The problem of insurance. Assuming that tort law does
deter, at least sometimes, what happens when potential plaintiffs and defendants are insured?
How does liability insurance affect the viability of using negligence to deter unwanted and
uneconomic acts? Economists and legal scholars call the problem that insurance raises for the
behavior of insured actors “moral hazard.” If people are insured, the theory goes, they have less
incentive to take reasonable precautions to avoid accidents, and our negligence deterrence system
will fail. Recall, for example, the defendant in Vaughn v. Menlove from Chapter 4, who chose to
risk a fire because he had purchased property insurance.
Fleming James, who was skeptical of the significance of rational incentives, concluded
that there was no evidence available to prove that increasing rates of insurance led to increased
carelessness. Fleming James, Jr., Accident Liability Reconsidered: The Impact of Liability
Insurance, 57 YALE L.J. 549 (1948). But today many scholars, especially those of an economic
orientation, are more likely to credit the significance of moral hazard, at least in some forms. And
the empirical evidence suggests that there is some reason to think that the moral hazard effect is at
work in modern liability insurance markets. Cohen and Dehejia, for example, found that
compulsory auto insurance regimes produced an increase in fatalities; for each percentage point
decrease in uninsured motorists in a state (i.e., for an increase in drivers covered by insurance),
they found a one percent increase in traffic fatalities. Cohen & Dehejia, The Effect of Automobile
Insurance, supra.
But the connection between insurance and accident rates is not a simple one. Insurance
companies know all about moral hazard, of course. They would go bankrupt very quickly if they
did not take it into account in pricing and shaping their policies. Much of the structure of the
typical liability insurance business is designed to counteract the incentives that the fact of
insurance will create for their customers. Insurers try to screen out bad risks at the front-end of
the process. And once they enter into insurance contracts, they design those contracts to
encourage safe behavior; as Professor Tom Baker puts it, insurers seek to create insurance
contracts that do “not encourage the wicked to apply or tempt good people to do wrong.” Tom
Baker, On the Genealogy of Moral Hazard, 75 TEX. L. REV. 237, 241 (1996).
One way insurers encourage safety is by developing and disseminating new safety
strategies and mechanisms. Insurance companies have powerful incentives—and an ideal
institutional position—to aggregate information about risks, to analyze it, and to share it with their
policy holders. In one of the most famous examples, firms offering insurance against the
catastrophic effects of early steam boilers were almost single-handedly responsible for
dramatically reducing the risks of boiler design and maintenance. See John Fabian Witt, Speedy
Fred Taylor and the Ironies of Enterprise Liability, 103 COLUM. L. REV. 1 (2003).
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