NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Subrogation and the Theory of Insurance When Suits Can Be Brought for Losses Suffered

A. Mitchell Polinsky, Steven Shavell

NBER Working Paper No. 23303
Issued in March 2017
NBER Program(s):   LE

The theory of insurance is considered here when an insured individual may be able to sue another party for the losses that the insured suffered—and thus when an insured has a potential source of compensation in addition to insurance coverage. Insurance policies reflect this possibility through so-called subrogation provisions that give insurers the right to step into the shoes of insureds and to bring suits against injurers. We show that subrogation provisions are a fundamental feature of optimal insurance contracts because they relieve litigation-related risks and result in lower premiums—financed by the litigation income of insurers. This income includes earnings from suits that insureds would not otherwise have brought. We also characterize optimal subrogation provisions in the presence of loading costs, moral hazard, and non-monetary losses.

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Document Object Identifier (DOI): 10.3386/w23303

 
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