Three-party settlement bargaining with an insurer duty to settle: Structural model and evidence from malpractice claims

Prior efforts to specify and then empirically estimate structural models of the outcomes of tort lawsuits involve only two parties-plaintiff and defendant. We incorporate the defendant's insurer and its "duty to settle" into a three-party settlement model. In medical malpractice cases, there is both anecdotal and quantitative evidence that policy limits and the insurer's duty to settle are central parts of settlement bargaining. We estimate the model using a Texas database of closed, paid medical malpractice claims. Both the data and our model predict a mass of cases with a settlement offer by the plaintiff exactly at limits; a smaller but still sizeable mass of cases with payout exactly at limits (both in pre-trial settlements and after trial), and substantial haircuts (payout<damages) in tried cases with damages > limits. In counterfactual analysis, we predict that, as dutyto-settle liability becomes stricter, there will be: more at-limits offers, fewer trials, fewer at-limits payments in tried cases, more insurer payments above limits, and smaller haircuts. (JEL K13, K41)