TheWelfare Implications of Insurance Bad Faith Liability: Evidence from the Royal Globe Doctrine

This paper analyzes the effects of the Royal Globe doctrine (increased insurance bad faith liability) on automobile bodily injury insurance claims outcomes. The study provides new evidence over a wide range of claim outcomes to paint a fuller picture of the effects of increased bad faith liability. The use of a “natural experiment” created by the “random” nature of the Royal Globe decision and the utilization of the powerful synthetic control method allows the study to make causal estimates on observed claims settlement practices, an advantage over previous work. The results suggest that despite some previous findings, insurers are not too deterred that they start paying more fraudulent claims and doing less investigations, and that the true beneficiaries of bad faith liability may be those small claims that absent the additional punitive damages would have no incentive to sue for claims underpayment. Overall, the results indicate that bad faith liability may be efficiency enhancing