Bad Debt Loss Insurance in Settlement and Litigation

Kirstein Annette, Roland Kirstein and Gerhard Hans
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Kirstein Annette: University of Karlsruhe Otto-von-Guericke University, Magdeburg Saarland University
Gerhard Hans: University of Karlsruhe Otto-von-Guericke University, Magdeburg Saarland University

Review of Law & Economics, 2010, vol. 6, issue 1, pages 107-124

Abstract: We analyze the impact of Bad Debt Loss Insurance on settlement outcomes. A success in a settlement or trial can turn into a disaster when the defendant goes bankrupt before paying the plaintiff's claim. The starting point of our paper is a simple trial and litigation model with perfect and complete information. We add the possibility of a defendant’s bankruptcy, and of buying Bad Debt Loss Insurance for both the settlement and the trial stage. We demonstrate that trial insurance and settlement insurance have different impacts on the predicted outcome of settlement negotiations. Trial insurance tends to increase the settlement result; therefore, it generates a contract rent for the insurer and the insured. Settlement insurance, however, has the opposite effect, as it decreases the settlement result.

Date: 2010
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