Academic journal article Vanderbilt Law Review

Insurers, Illusions of Judgment & Litigation

Academic journal article Vanderbilt Law Review

Insurers, Illusions of Judgment & Litigation

Article excerpt

Insurers play a critical role in the civil justice system. By providing liability insurance to parties who would otherwise be untenable as defendants, insurers make litigation possible. Once litigation materializes, insurers provide representation, pay legal fees, and often play a central role in resolving disputes through settlement or adjudication. In this paper, we explore empirically how these key litigation players make important decisions in the litigation process, like evaluating a case, deciding whether to settle, and if so, on what terms. We find that insurers, though not entirely immune to the effects of cognitive illusions that have been shown to distort litigation decision making, appear to make decisions in a more economically rational fashion than other litigation players. This finding, though preliminary, casts new light on litigation theory and practice.


Litigation brings out the worst in people. The fact that a dispute gets litigated means that it is unusually contentious; parties turn to the courts only as a last resort.1 In such disputes, the parties are apt to behave unreasonably and to struggle to make rational decisions. But perhaps those parties who have greater experience with the contentious and uncertain world of litigation might make more clear-eyed decisions. In particular, one might expect that insurers-who litigate constantly-would make rational decisions, or at least more rational decisions than other, less experienced litigants.

Psychological research on litigants' decisionmaking supports the intuition that most litigants fail to evaluate their options in a cool, clear fashion or to select those options that promise the greatest return.2 This research reveals that litigants are susceptible to "anchoring" effects;3 that their decisions are influenced by the way options are framed relative to the status quo position;4 and that they are inclined to interpret identical facts about cases in ways that support their own positions.5

This model of litigant behavior stands in stark contrast to the model that law and economics scholars have proposed. The law and economics model, which is based on rational choice theory, assumes that litigants are rational actors who make outcome-maximizing decisions in litigation.6 The psychological model suggests that the purely rational litigant assumed by the law and economics model is an overstatement, if not an outright fiction. According to the psychological account, the assumption of homo economicus embedded in the law and economics model should be replaced with the admittedly more complicated, but descriptively more accurate, homo psychologicus.7

But might there be more to the economic model than the latest psychological research suggests? Disputing parties are, after all, not the only actors who make decisions in the litigation process. Lawyers and judges, who might be more objective than the litigants themselves, also play an important role. But lawyers and judges can only do so much to ameliorate the potential foolishness of the litigants who, in the end, must decide how to conduct themselves.8 Indeed, lawyers have their own interests, which sometimes compete with those of their clients, and judges might lack sufficient contact with litigants to play a significant role in improving their decisionmaking. Furthermore, both lawyers and judges have been shown to suffer from some of the same kinds of cognitive errors that affect litigants.9

But what about insurers? The key stakeholders in litigation-at least on the defense side-are seldom the individual litigants who have been sued. Rather, insurers are the entities who regularly pay not only the cost of defending claims but also any settlement or judgment. Insured parties retain some authority to make substantive litigation decisions, but the practical reality is that insurers drive litigation outcomes.10

An empirical study conducted by Samuel Gross and Kent Syverud illustrates the important stakeholder role that insurers play in litigation. …

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