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Legal-Expenses Insurance and Settlement

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  • Qiao Yue

    (Shandong University)

Abstract

In this paper we consider the effects of legal-expenses insurance on settlement. Using a one-shot asymmetric information model of litigation, we scrutinize the litigants' interactions under the situations that the plaintiff is before-the-event insured, after-the-event insured or self-funded. We investigate the effects of insurance on settlement probabilities, settlement amounts, care levels and the plaintiff's welfare. We also show how the model can be amended to include a "recoverable" element of the insurance. Our results exhibit that insurance increases the plaintiff's expectation on settlement amount but its effects on settlement probabilities and care levels depend on the distribution of the accident loss. This is partly because asymmetric information distorts the litigants' negotiation power. Insurance can either increase or decrease welfare.

Suggested Citation

  • Qiao Yue, 2010. "Legal-Expenses Insurance and Settlement," Asian Journal of Law and Economics, De Gruyter, vol. 1(1), pages 1-19, July.
    • Handle: RePEc:bpj:ajlecn:v:1:y:2010:i:1:n:4
    DOI: 10.2202/2154-4611.1003
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    References listed on IDEAS

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    1. Heyes, Anthony & Rickman, Neil & Tzavara, Dionisia, 2004. "Legal expenses insurance, risk aversion and litigation," International Review of Law and Economics, Elsevier, vol. 24(1), pages 107-119, March.
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    3. Baik, Kyung Hwan & Kim, In-Gyu, 2007. "Contingent fees versus legal expenses insurance," International Review of Law and Economics, Elsevier, vol. 27(3), pages 351-361, September.
    4. Gravelle, Hugh & Waterson, Michael, 1993. "No Win, No Fee: Some Economics of Contingent Legal Fees," Economic Journal, Royal Economic Society, vol. 103(420), pages 1205-1220, September.
    5. Roland Kirstein, 2000. "Risk Neutrality and Strategic Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 25(2), pages 251-261, April.
    6. van Velthoven, Ben & van Wijck, Peter, 2001. "Legal cost insurance and social welfare," Economics Letters, Elsevier, vol. 72(3), pages 387-396, September.
    7. Jennifer F. Reinganum & Louise L. Wilde, 1986. "Settlement, Litigation, and the Allocation of Litigation Costs," RAND Journal of Economics, The RAND Corporation, vol. 17(4), pages 557-566, Winter.
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    Cited by:

    1. Qiao, Yue, 2013. "Legal effort and optimal legal expenses insurance," Economic Modelling, Elsevier, vol. 32(C), pages 179-189.

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