The Effect of Bad Faith Laws on First-Party Insurance Claims Decisions

This study sets forth the legal distinctions among bad-faith laws and provides a theoretical foundation for our hypotheses that bad-faith laws affect both economic and noneconomic damage amounts. We use data that include information about uninsured and underinsured "closed claims"-that is, claims that have either been settled or been paid or closed after trial-under automobile policies from over 60 insurance companies in 38 jurisdictions in 1992. While controlling for multiple other factors that are expected to be associated with the size of settlement payments, we exploit differences in state laws that govern insurer bad faith to examine empirically whether bad-faith remedies affect the size of settlement payments and the allocation of settlement payments between economic and noneconomic damages. We find a positive correlation between the existence of a bad-faith remedy and higher settlement payments. This correlation exists for both economic and noneconomic damages.