L&E: Insurance Contracts

If transaction costs are low and property rights are well-defined, parties can negotiate to resolve externalities without legal intervention.

A cost-benefit formula used to determine negligence: liability exists if the burden of prevention is less than the probability of harm multiplied by its severity.

One party in a transaction has more or better information than the other.

Relief is given if a knowing party fails to inform an unknowing party, but only when disclosure is low-cost and no substantial investment in information was made.

Contractual tool where the informed party assumes the risk of quality or performance, used to correct information asymmetry.

Occurs BEFORE contract; individuals with higher risks are more likely to seek insurance, leading to skewed risk pool.

Arises AFTER contract is signed; individuals may take more risks because they are insured , making it difficult for the insurer to verify care levels

The insured must stand to lose something from the event insured against; prevents gambling, moral hazard, and externalities to uninvolved third parties.

Insured may not profit from insurance; only actual losses are compensated. Exceptions include life insurance policies and agreed-sum policies

The insured must disclose ALL relevant information; strict sanctions apply for non-disclosure

Insurance does NOT cover deliberate or criminal actions to reduce incentives for harmful behaviour