Nitpicky Insurers and the Law of Contracts

Jean-Marc Bourgeon and Pierre Picard

No 6669, CESifo Working Paper Series from CESifo

Abstract: The standard economic analysis of the insured-insurer relationship under moral hazard postulates a simplistic setup that hardly explains the many features of an insurance contract. We extend this setup to include the situation that the insured was facing at the time of the accident and the circumstances of the loss. We show that if this information is costlessly observable, then it should be included in the contract to improve the risk sharing-incentive trade-off under moral hazard. However, in practice the insurer observes the circumstances of the loss only in particular cases - most of the time by performing a costly audit - and almost never the situation the insured was facing at the time of the accident. The resulting incompleteness of the contract opens the door to controversies and disputes that may lead to judicial procedures. We show how the law of insurance contracts should allow insurers to incentivize policyholders to exert an adequate level of effort, and, at the same time, to limit their propencity to nitpick.

Keywords: insurance; moral hazard; incomplete contracts (search for similar items in EconPapers)
JEL-codes: D82 D86 G22 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cta, nep-ias, nep-law and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp6669.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6669

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().