By Katie Vloet and John Masson
Michigan Law Communications
A paper by Michigan Law’s Kyle Logue and the University of Chicago’s Omri Ben-Shahar has captured the 2013 Liberty Mutual Prize for the year’s most exceptional article on the law of property and casualty insurance.
“This is a tremendous honor, and Omri and I are both excited to hear about it,” Logue said.
The paper asks whether insurance could be a substitute for government regulation of safety. And according to the authors, the answer, at least in some cases, is yes.
Logue and Ben-Shahar’s work, “Outsourcing Regulation: How Insurance Reduces Moral Hazard,” was printed in the November 2012 edition of the Michigan Law Review.
“In many (though obviously not all) situations, private insurers, because of their inherent informational comparative advantage, should be expected to do the job of regulation better than public regulators and courts,” the paper says.
Indeed, the paper says, the law should at times mandate insurance coverage, “in order to harness the regulatory capacity of insurers,” with mandatory liability insurance serving as a substitute, for instance, for much of food-safety regulation. “Such mandatory insurance would be equivalent to making insurers the licensing agents for certain types of risky activities.”
That does not take government out of the process entirely, however. The law should, the paper says, monitor the “integrity of insurers’ decisions as regulators, anytime competition does not provide sufficient discipline.”
The authors lay out several scenarios, including what would happen if the insurance industry were responsible for food safety. They call the regulation of food safety a “daunting task” for the government. The recent outbreak of salmonella in peanut butter, for instance, poses a risk that’s hard to monitor; products pass through many hands in the chain of distribution, with risks every step of the way, “often outside the regulatory jurisdiction of local government regulators,” the authors write.
One solution might be to have compulsory liability insurance, they write. Another option would be to apply the mandate only to importers of food products, not to sellers of domestically grown and produced food. The role of government would be to monitor compliance with the mandatory insurance requirement—a much more limited role than the government currently plays.
“You could have an agency do it all. But an alternative is to use a combination of liability rules and insurance. It really isn’t that far from what we currently do, using civil liability under the right circumstances,” Logue said.
Literature on insurance law often focuses on insurance opportunism, the authors write, while this paper focuses on the flip side of improved safety.
“There are reasons the government needs to get involved sometimes; there are market failures. But you’re always trading off market failures and government intervention,”
Logue said. “Insurance companies aren’t perfect, but the advantage is that they have a financial incentive to reduce losses.
“It’s all about finding ways of making the world safer.”
The Liberty Mutual Prize, which will be presented formally to Logue and Ben-Shahar this fall, was created by the Liberty Mutual Insurance Group and is administered by the Boston College of Law.
Papers are judged by a panel of professors and attorneys with special expertise in insurance law. Submissions were judged on analysis, originality, thoroughness of research, creativity, and clarity of thought and expression.
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