The Reasonable Person Negligence Standard and Liability Insurance

• DOI: http://doi.org/10.1111/j.1539-6975.2008.00286.x
• Author: Paul D. Thistle,Vickie Bajtelsmit
• Date: 01 December 2008
• Published date: 01 December 2008

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The Journal of Risk and Insurance, 2008, Vol.75, No. 4, 815-823

THE REASONABLE PERSON NEGLIGENCE STAN DA RD

AND LIABILITY INSURANCE

Vickie Bajtelsmit

Paul D. Thistle

ABSTRACT

We show that, under the reasonable person negligence rule, heterogeneity

of potential injurers can be sufficient to create a demand for liability insur-

ance. Potential injurers with a low probability of accidents or a high cost

of exercising care have optimal levels of care that are below the negligence

standard. For these groups, it may be less costly to be negligent and purchase

insurance than to comply with the negligence standard. We show that the

availability of insurance is socially desirable.

INTRODUCTION

The purpose of this article is to provide a possible explanation for why individuals

purchase liability insurance under a negligence rule. Under a negligence rule, injurers

are responsible for the damages they cause to their victims only if they have not met

the applicable standard of care. If injurers meet that standard of care, then they are

not liable and victims bear the full cost of their injuries. Brown (1973) shows that risk-

neutral agents will meet the negligence standard if it is set optimally. Shavell (1982)

proves that this implies that risk-averse agents will meet the negligence standard

and therefore will choose not to purchase liability insurance. In the United States,

negligence is usually determined by the “reasonable person” standard, that is, the

level of care that would be taken by an average reasonable person. Thus, if a person

takes appropriate care, there is no reason to purchase liability insurance.

Substantial amounts of money are spent on liability insurance each year by indi-

viduals and businesses. For some types of negligence, the demand for insurance is

the result of legal (e.g., automobile liability, workers compensation) or contractual

Vickie Bajtelsmit is at the Department of Finance and Real Estate, Colorado State University,

Ft. Collins, CO 80523. Paul D. Thistle is at the Department of Finance, University of Nevada,

Las Vegas,NV 89154. The authors can be contacted via e-mail: vickie.bajtelsmit@colostate.edu

and paul.thistle@unlv.edu,respectively. An earlier version of this article was presented at the

American Risk and Insurance Association meeting. We would like to thank two anonymous

referees, whose comments have improved the article. Dr.Thistle’s research was supported by

the Nevada Insurance Education Foundation. We retain the responsibility for any remaining

errors.

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