Responding to Ted Frank's response to Professor Charles Silver

I do not presume to speak for Professor Silver, but I wanted to respond to the following  points raised by Ted Frank in response to Silver's article.

What we do know from Silver's dataset is that insurers do ignore insurance limits and settle for above policy limits a significant percentage of the time. Silver's hypothesis works only if one assumes the policy limits are firm; the alternative hypothesis works even if the policy limits are not firm—and Silver's dataset shows that, indeed, the policy limits are not absolute. Silver provides no explanation why insurers would settle some meritorious cases at policy limits and others above policy limits; it's not clear to me that any such explanation is possible. (Emphasis added.)

Source: PointofLaw.com | PointOfLaw Forum: Charles Silver on insurance limits

First, I don't mean to quibble, but Silver wrote, "Payments above the policy limits, which appear to the right of the spikes, were present in about 2% of the cases."  If Ted believes that 2% is a "significant percentage," that's his prerogative... but I bet that if a drug caused side effects for 2% of its users, Ted wouldn't consider that to be significant.

I've come up with a possible explanation as to why insurers would settle meritorious cases above policy limits.  Eric Turkewitz recently wrote about the high costs of bringing a medical malpractice case; buying medical records, retaining experts, taking depositions, etc.  Plaintiffs aren't the only parties that have to bear these costs.  If an insurance company believes the plaintiff has a a strong case and is likely to be awarded a sum that meets or exceeds the policy limit, the insurer will be willing to settle for an amount that is less than the policy limit plus the cost of defending the case. 

For example, if the doctor in question has a $250k policy and the insurer expects the litigation costs of going to trial will be $50k, the insurer will come out ahead if it settles the case for even $290k, which exceeds the policy limits.  The insurer will also have to take into consideration the potential cost of any appeal(s) when determining what amount to settle a case for.  Additionally, if a plaintiff is willing to accept a settlement that includes periodic payments, the insurer might be willing to settle for more than the policy limits in order to take advantage of the benefits of periodic payments.

Update: Ted is right, Professor Silver's dataset revealed that more than 2% of cases did settle for excess of policy limits.  We also shared a nice series of emails in which we discussed possible scenarios where it makes financial sense for insurers to settle cases above policy limits.  I'd share them with you, but Ted asked me not to repost his emails.  Suffice it to say, there actually are some situations where it is in the financial best interest of an insurer to settle a case above policy limits.

Cross-posted to TortDeform 

Technorati tags: Charles Silver, Ted Frank, Medical malpractice, insurance, tort reform, Tortdeform

Comments

[Ted]

I've updated my response to address your argument, which suffers from a misunderstanding of both the dataset and the relevant Texas law. Please update your TortReform post accordingly.

[Justinian Lane]

It won't be until later this weekend that I can read the relevant links/papers to properly respond to the first part of your arguments. Once I do so, I'll update this and the TD post.

Setting that issue aside, it's not clear to me why the case you cite disproves my theory. If anything, it strengthens it. (Drastically simplified, Ted's case says that an insurer doesn't get in trouble for refusing to settle a case for a demand that's above policy limits.) Is it not in an insurers economic self-interest to settle a case for a dollar amount less than the sum of policy limits and the cost of taking the case to trial?

This seems to be more plausible than your theory that insurers settle cases above policy limits (and against their self-interest) for no reason at all.

[Ted]

"Is it not in an insurers economic self-interest to settle a case for a dollar amount less than the sum of policy limits and the cost of taking the case to trial?"

If L=policy limits, T=cost of taking case to trial, and P=chance of winning, it's in the insurer's economic self-interest to take the case to trial if P>T/L. In Texas, the insurer's liability is capped at L unless a settlement offer is made at or below L.

The missing variable is the quality of the case, and that's simply not in the TDI data Silver is using.

"This seems to be more plausible than your theory that insurers settle cases above policy limits (and against their self-interest) for no reason at all."

That's not my theory, as anyone who has read the half-dozen or so posts where I discuss Silver's work would know.