PREEMPTING LIABILITY

Preempting Liability

Preempting Liability

Introduction

Like other forms of insurance, liability insurance is a way of protecting oneself financially against the risk of some adverse event taking place. Specifically, it confers protection from the risk of being held legally liable to pay damages to some third party (neither the insurer nor the insured himself)—hence the alternative name, 'third party insurance'. Insurance is commonly carried against potential civil liability in tort law. Indeed, it is required by law before undertaking certain risky activities.

Insuring against liability was at one time thought to be very dubious, so much so that it was deemed 'contrary to public policy' and legally invalid. To the extent that civil liability is intended to punish the defendant, this was obvious enough—allowing insurance against punishment removes its sting, since the insurer and not the defendant will bear the cost. Such attitudes seem to have changed by the end of the nineteenth century, however, when liability insurance became readily available in England. This reflected a shift in the law's perceived reason for imposing civil liability: away from punishing defendants, and towards the compensation of claimants (which liability insurance, as will be seen, positively facilitates). However, even today one may not insure against the risk of being held guilty of a crime—it would be against public policy for insurance to blunt the penalty handed down upon conviction. And with regard to tort liability insurance, insurers recognize that there is a problem of 'moral hazard'—that is to say, someone insured against liability will have reduced incentives to avoid such liability (Ormerod, 2005). With regard to the tort of negligence in particular, the fear is that those insured will be less careful than those who would have to pay the damages themselves. To a limited extent, insurers try to counteract this tendency with devices such as variable premiums based on the risk rating of the insured (such as the driver's 'no claims bonus').

Discussion

As well as undermining tort law's deterrent effects, it has been argued that insurance contradicts the principle of 'corrective justice', that when one person damages another by his wrong, he ought to compensate the other (or the loss should be shifted from the victim to the wrongdoer). The concern is that when the defendant is insured, the loss is shifted not to him, but to the insurer (and ultimately to all payers of insurance premiums). Taken together, the critique is that insurance undermines individual responsibility. And yet liability insurance has been current in England for over a century, and seems to be universally accepted in legal systems around the world (a notable exception at one time was the USSR, which interestingly treated liability insurance as inconsistent with socialist values; post 1990 Russia has fallen into line with the West). Why the dramatic, and pervasive, reversal of legal attitudes? (Hart and Albert, 1994).

While insuring against liability might appear to be for the benefit of the person paying the premium (the potential defendant), in reality it benefits the potential victims of his torts equally, ...