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Subrogation and Insolvency

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  • Sykes, Alan O

Abstract

When tort judgments exceed the assets of tortfeasors and the tort victim has first-party insurance for a portion of the loss suffered, the question arises as to how the recovery from the tortfeasor should be divided between the tort victim on the one hand and the insurer via its rights of subrogation on the other. A common view among the courts and legal commentators is that the insured should be made whole before the insurer recovers subrogation. This paper employs simple models of optimal insurance contracts to show that the opposite rule will often be optimal. Accordingly, there is little basis for judicial interference with freedom of contract when the insurance agreement provides that the insurer must be made whole before the insured receives any portion of the recovery. The analysis also provides some support for allowing the insurer to take first as a default rule at common law. Copyright 2001 by the University of Chicago.

Suggested Citation

  • Sykes, Alan O, 2001. "Subrogation and Insolvency," The Journal of Legal Studies, University of Chicago Press, vol. 30(2), pages 383-399, Part I Ju.
    • Handle: RePEc:ucp:jlstud:v:30:y:2001:i:2:p:383-99
    DOI: 10.1086/322054
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    Cited by:

    1. Fernando Gomez-Pomar & Mireia Artigot-Golobardes, "undated". "Wer sollte die Kosten von Unfällen am Arbeitsplatz tragen? Die schwierige Koordination von Arbeiterunfallversicherung und Delikthaftung aus ökonomischer Sicht," German Working Papers in Law and Economics 2004-1-1105, Berkeley Electronic Press.
    2. Alan O. Sykes, 2002. "New Directions in Law and Economics," The American Economist, Sage Publications, vol. 46(1), pages 10-21, March.
    3. Kenneth S. Reinker & David Rosenberg, 2007. "Unlimited Subrogation: Improving Medical Malpractice Liability by Allowing Insurers to Take Charge," The Journal of Legal Studies, University of Chicago Press, vol. 36(S2), pages 261-289, June.
    4. Gomez, Fernando & Penalva, Jose, 2015. "Tort reform and the theory of coordinating tort and insurance," International Review of Law and Economics, Elsevier, vol. 43(C), pages 83-97.
    5. Spurr, Stephen J., 2021. "Subrogation and its consequences for tort litigation," International Review of Law and Economics, Elsevier, vol. 67(C).
    6. Parisi, Francesco & Palmer, Vernon Valentine & Bussani, Mauro, 2007. "The comparative law and economics of pure economic loss," International Review of Law and Economics, Elsevier, vol. 27(1), pages 29-48, March.

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