The Glaring Gap in Tort Theory

abstract. The glaring gap in tort theory is its failure to take adequate account of liability insurance. Much of tort theory fails to recognize the active and central role that liability insurance plays in tort law and litigation, or mentions liability insurance only briefly. Liability insurance is treated as exogenous to tort law itself—as if it were merely a contingent source of outside financing, like a bank that passively guarantees a loan. It is no exaggeration to say that liability insurance played a defining and (in our view) salutary role in creating modern tort liability. Modern tort liability would not look at all as it does today if liability insurance had not existed and influenced tort law’s development in the ways that it did.

This Article calls upon tort scholars of all theoretical and methodological stripes to address the significance of liability insurance by incorporating consideration of liability insurance into their work. We first lay the groundwork for understanding liability insurance’s significance by describing the role that liability insurance plays in the life cycle of a tort claim, sketching the contemporary incidence of liability insurance and commercial self-insurance. We then provide a novel contribution to the tort law literature by identifying a collection of important judicial opinions that have made express reference to the availability (or unavailability) of liability insurance in precedent-setting, liability-expanding, and liability-limiting tort cases. We further identify the ways that liability insurance historically has influenced, and continues to influence, the shape and scope of tort law. We specifically identify a number of significant tort law doctrines and practices, such as the thin-skull rule, that we argue would never have persisted in the absence of liability insurance. Given this evidence, we argue that it is liability insurers who—paradoxically—have fueled the continuing expansion of American tort liability that began more than a century ago.

We then examine modern tort theory, much of which fails to take adequate account of liability insurance. We explain how to begin filling the gap in tort theory that results from omitting consideration of or inadequately considering liability insurance, showing how liability insurance can appropriately figure in both deontic and consequentialist theories of tort liability. Only by greater recognition and candid acknowledgment of the role that liability insurance plays in tort cases can tort theory provide an accurate picture of the field that it seeks to describe.

Finally, we offer lessons for the courts, calling not only for more open acknowledgment of the significance of liability insurance in judicial opinions but also for a radical change in trial practice by proposing that judges explicitly consider record evidence (including the availability of liability insurance) on the insurability of the risk at issue in tort cases.

authors. Kenneth S. Abraham is David and Mary Harrison Distinguished Professor of Law, University of Virginia School of Law; Catherine M. Sharkey is Segal Family Professor of Regulatory Law and Policy, New York University School of Law. Jonathan Arone (NYU 2024), David Leynov (NYU 2024), Anna Lifsec (NYU 2025), and Ethan Young (Virginia 2024) provided excellent research assistance. We presented a draft of this Article at the NYC Tort Theory Workshop, the NYU Law Faculty Workshop, and the Yale Private Law Colloquium, where we received helpful feedback. We are also grateful to Tom Baker, Anita Bernstein, Vincent Blasi, Jonathan Cardi, Martha Chamallas, Nora Freeman Engstrom, Mark Geistfeld, John C.P. Goldberg, Moshe Halbertal, Daniel Hemel, Gregory Keating, Leslie Kendrick, Alexandra Lahav, Ariel Porat, Robert L. Rabin, Ketan Ramakrishnan, Arthur Ripstein, Daniel Schwarcz, Anthony Sebok, Gregg Strauss, and Benjamin C. Zipursky for insightful comments.

Introduction

We can take the mystery out of the matter right away. The glaring gap in tort theory1 is its failure to take adequate account of liability insurance. Although liability insurance plays a substantial role in the life cycle of tort claims, it does not feature prominently in any leading tort theory. Liability insurance not only influences judicial decisions about whether and when there should be liability—as courts have recognized for decades, some openly and some only implicitly—but also influences the tort system in other ways that tort theory has barely recognized.

By our estimate, liability insurance pays as much as eighty to eighty-five percent of all tort damages.2 Yet given that most academic discussions of tort theory make little or no reference to liability insurance, much tort theory is either unaware that liability insurance pays most tort claims, or, apparently, considers this fact largely irrelevant. Other tort theory makes reference to liability insurance, but does so without rigorously examining the many ways in which liability insurance influences tort liability, beyond being a mere source of funding.

Just as importantly, much of the torts literature also has failed to recognize how liability insurance and liability insurers actively influence the course and dynamics of tort litigation—both before a tort claim is made, and throughout the course of subsequent litigation. Then, after trial, liability insurers decide whether to take appeals on behalf of their policyholders and whether to fight appeals by plaintiffs who have lost at trial. Liability insurers thus decide when to take the risk that plaintiffs will make new law on appeal that expands liability. And liability insurers have been playing this role and having this kind of influence for more than a century. Thus, the role of insurers goes far beyond the simplistic idea that liability insurance is just a source of funds available only after a tort claim has been resolved.3 In short, both quantitatively and qualitatively, liability insurance has always had a fundamental influence on the shape and scope of tort liability.

Yet much of tort theory has little or nothing to say about liability insurance.4 For example, Professors John Goldberg and Benjamin Zipursky, two of the most prominent tort theorists writing today, devote less than two pages to discussion of liability insurance in their book about civil recourse theory.5 Professor Gregory Keating’s most recent book on tort theory also mentions liability insurance only briefly and engages in almost no analysis of its current or historical role in the tort system.6 Even when tort theorists mention liability insurance, often it is mentioned only briefly and treated as exogenous to tort law itself, as if liability insurance were merely a contingent source of outside financing.7 This approach views liability insurance like a bank that passively guarantees a loan rather than what it is in reality: an active and, often, arguably the most important ingredient of, and influence on, tort liability itself.

The stakes here are significant. Positive tort law theories aim to provide as complete a picture as possible of what tort law and tort liability are. Therefore, these theories should provide an account of the role played by liability insurance. Without accounting for liability insurance, a positive tort theory is incomplete and therefore inaccurate. And to the extent that a normative tort theory envisions what the scope and nature of tort liability should be, then omitting the role that liability insurance will play in that vision will render the theory unrealistic. For the courts and for the tort system, the doctrinal evolution of tort law is at stake. The issue is whether courts will address new risks by routinely considering the insurability of liability for those risks, as many, but not all, courts, have long done.

It is possible to differ about how much some of the torts literature recognizes the existence and influence of liability insurance, and how much does not.8 Suffice it to say that, for the most part, liability insurance stays in the background of much tort theory, and that analysis of liability insurance does not figure in an important way in any contemporary tort theory. Our point is that liability insurance should be much more frequently and extensively in the foreground of tort theory. We therefore aim to show how liability insurance figures in tort liability, and why it should be an important and characteristic ingredient of any theory of tort liability that attempts to account for tort liability as it actually exists, or how tort law became what it is now. We use the term “ingredient” in reference to liability insurance’s role in tort law because the analogy to a recipe fits almost perfectly.9 For example, “cake” is made with flour. There is such a thing as what is sometimes called “flourless cake,” but it is an unusual version, arguably even an imitation, of cake. Its very name emphasizes the absence of one of the characteristic ingredients of “cake.”10 Similarly, mortgage financing is not a formally necessary feature of home ownership in the United States. It is logically possible to own a home without financing its purchase through a mortgage loan. But eighty percent of homebuyers finance their purchases with mortgage loans.11 To describe the nature of homeownership in the United States without reference to mortgages would be to provide a fundamentally incomplete and misleading portrait of this phenomenon. So it is with contemporary tort liability. Liability insurance is a characteristic ingredient that is central to tort liability.

In addition, it is no exaggeration to say that liability insurance played a defining role in creating modern tort liability, and that modern tort liability would not look at all like it looks today if liability insurance had not existed and influenced tort liability’s development in the ways that did.12 To the extent that tort law is a “law of wrongs,” as Professors Goldberg and Zipursky insist,13 it might still be a law of wrongs if liability insurance had never existed, but it would not be the law of wrongs in contemporary tort law. The wrongs would be different, and the law governing them would be different, because the way the courts think about what should count as a tortious wrong has been influenced by the presence and availability of liability insurance. And to the extent that tort law is concerned with creating incentives and deterring harmful conduct, as prominent consequentialist tort theorists (including one of us) have argued,14 tort law would have a different shape as well, because liability insurance has always employed important methods of achieving these goals, including risk-based pricing.15 For these reasons, this Article aims to demonstrate the ways in which liability insurance should be included in accurate and meaningful theories of tort law, whatever they are.

We appreciate the fact that some tort theorists may not address liability insurance because they are sometimes addressing the narrow question of what comprises the logical, normative structure of tort law.16 Liability insurance is excluded from this structure, apparently, because it is possible to conceive of tort law rules as they are stated in judicial opinions and treatises without reference to liability insurance.17 Even so, the plethora of tort cases—from state and federal courts across myriad jurisdictions—in which judges explicitly mention insurance as relevant to their doctrinal determinations challenges this framing.18 That said, if the goal of these tort theorists is to identify some abstract essence of tort law, analogous to the Platonic essence of cake or home ownership, we have little to say relevant to that form of theorizing.19 What matters to us here is the way in which liability insurance is, in a very real sense, a characteristic ingredient of most tort liability as we know it today, discussed explicitly by courts in key doctrinal disputes, and often an unacknowledged ingredient of the rules that courts adopt.

In our view, the role played by liability insurance in tort has been and continues to be beneficial. Liability insurance spreads the risk of tort liability, often helps to promote safety, ensures compensation for some tort victims who would otherwise not be compensated, and enables planning and budgeting that would require reserving or encumbering of assets if liability insurance could not be relied on by potential defendants to fund tort liability. The insurance-facilitated expansion of tort liability has been a byproduct of liability insurance’s characteristics. But our project is mainly positive and descriptive with regard to liability insurance, albeit designed to spur its incorporation and elaboration in descriptive and normative tort theories.

Our analysis proceeds in four parts. Part I is largely concerned with the scope and nature of the liability insurance that covers the parties and potential parties to tort suits. This Part lays the groundwork for our analysis by describing the role that liability insurance plays in the life cycle of a tort claim, sketching the contemporary incidence of liability insurance and commercial self-insurance, and estimating that liability insurance pays as much as eighty to eighty-five percent of all tort costs.

Part II turns from the parties and their liability insurance to the courts and tort law doctrine. Part II highlights liability insurance’s central role in developing tort doctrine. It opens with an extended sampling of significant judicial opinions chosen for expressly referencing the availability (or unavailability) of liability insurance and being precedent-setting, liability-expanding, or liability-limiting tort cases. It then identifies and analyzes the ways that liability insurance historically has influenced, and continues to influence, the shape and scope of tort law, singling out important tort law doctrines that would never have persisted in the absence of liability insurance. Part II concludes by demonstrating how, through the exercise of their duty to defend their policyholders and their right and duty to settle claims under their policies, liability insurers have long been and continue to be the real parties in interest in the vast majority of tort suits. We argue further that, paradoxically, through their effort to combat tort liability in individual lawsuits, liability insurers have fueled the expansion of American tort liability that began over a century ago.

Parts III and IV move beyond the descriptions in the first two Parts to offer an original critique, and opportunities for reform, of tort theory. Part III establishes that existing tort theories fail to capture the influence of liability insurance discussed in Parts I and II. Part III then begins to fill the resulting gap in tort theory. Specifically, Part III shows how liability insurance can present challenges to, and appropriately figure into, both deontic and consequentialist theories of tort liability. We attempt to explain how deontic theories could integrate liability insurance into their frameworks, though we see our effort mainly as a challenge to deontic theorists either to accept or to explain the reasons for their rejection of our contentions. Turning to consequentialist theories, we focus on the interaction between liability insurance and the deterrent aims of tort liability. We suggest the ways in which, despite the moral hazard that liability insurance creates, liability insurance and deterrence can fruitfully coexist and even prove synergistic.

Finally, in view of our contention that accounting for liability insurance is consistent with both deontic and consequentialist tort theories, Part IV offers lessons for the courts to follow in taking liability insurance into account, whether they are operating under deontic or consequentialist assumptions. It begins with some thoughts about the reasons courts historically have been more reticent in their opinions about acknowledging the influence of liability insurance than we believe they ought to be. We call not only for more open acknowledgment of this influence in judicial opinions but also for holding that evidence of market availability of the form of insurance that would cover the form of tort liability at issue is admissible as an addition to the record, though not brought to a jury’s attention. This change will be regarded by some as revolutionary, but in fact it would simply make formally available to the courts what they often consider informally and outside the evidentiary process. Indeed, it is a matter of common sense that something as important and influential as the insurability of the risk at issue in a tort case be part of the record in that case rather than being a matter of speculation or assumption, as it has been in some of the cases we canvass. This Part then examines the considerations that affect whether the courts should expect liability insurance against potential new forms of liability to develop. The core lessons are that a new form of liability must either fall into a preexisting category of insurance coverage or generate sufficient demand for insurance to warrant the costs entailed in creating insurance to cover it. In addition, moral hazard and informational uncertainty considerations also may play a role in influencing the liability insurance market.