Strict Liability Insurance Essay

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Assume now that injurers are subject to liability, but that insurance is again unavailable; thus, injurers do not possess liability insurance coverage and victims do not hold accident coverage. In this situation, the outcome is, in essence, that injurers will be led to reduce risk due to the effect of liability, but the allocation of risk will depend on whether the form of liability is strict or the negligence rule. In particular, under strict liability injurers will have a motive to reduce risk and victims will, by definition, be compensated for any losses they sustain; it is injurers who will bear risk. If injurers are risk-neutral, their bearing of risk will not matter, and the outcome will be socially ideal. But if strictly liable injurers …show more content…

In addition, for these reasons injurers may be undesirably discouraged from engaging in an activity. One way of alleviating these problems of excessive care and too low a level of activity under strict liability is to reduce damages; indeed, it can be shown to be beneficial for damages to be less than harm for this reason. In other words, if injurers are risk averse, it is not socially desirable to “internalize” fully the harm they do. The situation is quite different under the negligence rule, because injurers will not bear risk provided that they take due care (and that the courts accurately assess their level of care), which they will decide to do. Hence there will be no particular problems respecting injurers when they are risk averse; they will not be led to take excessive care nor be undesirably discouraged from engaging in an activity. Victims, on the other hand, will bear their losses (presuming that injurers are not mistakenly found negligent). As a consequence, social welfare will be less than optimal if victims are risk averse and are not insured. The foregoing points thus introduce a new element into the comparison of strict liability and the negligence

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