Markets which only look like an infinite regress

by on July 12, 2008 at 9:47 am in Economics | Permalink

The risk that a claim won’t
be paid–a potential downside that every buyer of insurance faces–was an
uninsured exposure until recently, according to the developers of a new
policy to provide coverage so that risk managers can contest such
rejections…

The
new coverage, available to businesses of all sizes, will pay up to
$250,000 in legal expenses associated with contesting the denial of an
insurance claim under a commercial policy.

Here is the economic rationale:      

Mr.
Surdyk said that during the course of his work with insureds, he found
that while many clients had legitimate disputes with their insurers,
the underlying claims being denied were small-dollar amounts relative
to the legal costs of coverage disputes.  It wasnt
worth it for a client to hire us to file a lawsuit against an insurance
company over $50,000–and insurance companies know that, he said.

Here is the full story, and thanks to Travis for the pointer.

Someone from the other side July 12, 2008 at 10:02 am

Not sure how innovative this is. Legal expense insurance for much wider varieties (in general, the above case would probably be included) of legal cases (sometimes even criminal cases are covered to some extent) have been available for decades in Europe (now I could see why they may not be offered in the US…).

J Thomas July 12, 2008 at 10:38 am

If you think your insurer will likely falsely deny your claim, why take out insurance with him?

Wouldn’t it be enough to have some sort of webpage where businesses that feel they’ve been stiffed by their insurers can report it to anyone who wants to look?

Insurance companies would have an incentive not to be significantly worse than the median insurance company.

eric mcfadden July 12, 2008 at 11:27 am

I wonder if you get a lower rate on this insurance by signaling to your origional insurer that you have bought this insurance. I bet the payout rate on minor claims goes up on those who have legal expense insurance as well.

MattF July 12, 2008 at 12:38 pm

Um, I’d guess that this would cause insurers to increase their premiums– insurers are going to either pay more claims than previously, or hire more lawyers, or both.

Kevin Postlewaite July 14, 2008 at 3:21 pm

Suppose it’s true that:
“It wasn’t worth it for a client to hire us to file a lawsuit against an insurance company over $50,000—and insurance companies know that”

Then, wouldn’t the non-payment of such claims be factored into the price of the insurance (in a competitive market at least)? Should the insurer now have two prices, the price without and with this new coverage, and shouldn’t the price of the insurance with this new coverage be higher?

-Kevin

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