Incentive Effect of Liability Rules in the Presence of Liability Insurance in the Maritime Law Context: An Economic Analysis

Abstract

Incentive effect of liability law may be affected by the presence of liability insurance. Apparently when a party has liability insurance and does not have to pay directly from its own pocket, it will have less motivation to exercise proper care. This tendency of an insured is known as “moral hazard.” There are many studies on the problem of “moral hazard” and on various mechanisms how to address it. Yet, there is a lack of academic discussion on comparative analysis between liability law and liability insurance in terms of their effect on creation of incentives; that is, whether liability law alone induces best care or whether liability insurance with its various incentive mechanisms leads to better care. Of course, liability insurance cannot exist without liability law. This paper argues that the presence of liability insurance produces better incentives towards care than liability law alone.