HAZARD IN THE COURTROOM: MORAL HAZARD’S ABILITY TO EXPLAIN AN INSURED’S BEHAVIOR AND WHAT IT MEANS FOR FEDERAL RULES

OF EVIDENCE RULE 411 Jared S. Livingston1a

TABLE OF CONTENTS I. II. III. Introduction ........................................................................................................2 The History and Policy of Rule 411 ..................................................................4 Moral Hazard: More Than a Mere Guess ..........................................................9 a. Moral Hazard: What is It?............................................................................9 b. Empirical Evidence of Moral Hazard ........................................................12 c. Why Moral Hazard Has Not Been Considered ..........................................14 The Relevance of Moral Hazard ......................................................................16 a. Moral Hazard Passes Relevance’s Low Hurdle .........................................16 b. Applying Moral Hazard .............................................................................18 c. Why Moral Hazard Produces Loss ............................................................20 d. The Kinds of Losses Created and the Liability of Those Losses ...............21 e. Incentives as Relevant Evidence in Other Situations ................................24 Considering the Probative Value of the Moral Hazard Inference ....................27 a. Irresponsibility is a Market-Specific Criticism ..........................................30 b. The Mystery of Uninsured Motorists .........................................................31 c. Need for Further Investigation ...................................................................34 Reconsidering the Prejudicial Effect of Evidence of Insurance ......................36 a. Imagined and Exaggerated Prejudice.........................................................37 b. Even if There Was Prejudice, It is Curable................................................39 Conclusion .......................................................................................................43

IV.

V.

VI.

VII.

1a

J.D. Case Western Reserve University School of Law, 2011. Mr. Livingston is now an associate with the Law Offices of Stuart Berger, PLLC in Houston, Texas.

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ABSTRACT This note explores whether moral hazard—a behavioral phenomenon that explains an insured’s behavior—may justify another look at the blanket exclusion of Federal Rules of Evidence Rule 411. Not only does moral hazard implicate the relevance of evidence of insurance in a negligence action, but it may also reveal that the evidence is not as prejudicial as many scholars and courts had originally supposed. As a result, Rule 411 could be over-exclusive in its application, excluding not only a wholly irrelevant part of insurance evidence--the wealth or ability-to-pay implication—but also the part of insurance evidence that implies an insured’s possible subjection to moral hazard. This note discusses how the moral hazard part of insurance evidence is relevant, and how this evidence yields sufficient probative value to overcome any potential prejudice.

I.

INTRODUCTION A car’s brakes fail, by no fault of the driver, sending the car and its driver careening

down a hill, at the bottom of which stands a house and an adjacent pond. Impact is imminent, and the driver, whether heading for the pond or the house, will likely suffer an equal amount of damage to her car regardless of the direction she steers. Seconds away from impact, the driver knows, if only in the deep recesses of her mind, that her vehicle is covered by liability insurance. With an insurance policy that covers liability for property damage, but not for damage that water causes the car, the driver makes an almost instinctual decision and veers towards the house— away from the pond—crashing through it, and hitting the homeowner who happens to be inside. The homeowner sues the driver for battery, for which cause of action the homeowner-plaintiff must demonstrate the driver’s intention of trucking through the home. To do so, the plaintiff seeks to introduce evidence of the defendant driver’s insurance policy. Maintaining that the automobile manufacturer was to blame and that there was no intention to aim for the house, the defendant objects to the introduction of evidence on the grounds that it is inadmissible.1

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FED. R. EVID. 411. According to Federal Rules of Evidence 411, evidence of insurance is inadmissible on the issue of negligence or wrongdoing.

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Aside from being a daunting torts exam question, this glance into the driver’s behavior is an illustration of what economists call moral hazard: a phenomenon positing that people change their behavior when they do not bear the full costs of their actions.2 Here, because the driver’s policy insures against property and personal injury liability, the driver would not have to pay the full compensatory amount of expenses in the case of an accident. Because the driver thus does not bear the full costs of such a decision, the driver may even subconsciously adjust her behavior so that she prefers behavior that happens to make personal injury more likely and uncovered damages less likely. Although this hypothetical is just that—hypothetical—and is unlikely to occur, it illustrates how under current evidentiary rules, what is relevant to an economist may not be relevant in the courtroom. In other words, moral hazard as an explanation for behavior of insured individuals would unsuccessfully penetrate the suppressive wall that the Federal Rules of Evidence have erected around evidence of insurance on the issue of negligence or wrongdoing.3 This is because Rule 411 excludes evidence of insurance from the standard probativenessprejudice balancing prescribed by the federal rules,4 and any judge would likely be obliged to exclude the evidence of the driver’s insurance policy, regardless of its explanatory power.5 This note raises the point that considering evidence of insurance within a moral hazard framework may justify another look at the blanket exclusion of Rule 411. Not only does moral hazard implicate the relevance of evidence of insurance in a negligence action—and may do so

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DONALD E. CAMPBELL, INCENTIVES: MOTIVATION AND THE ECONOMICS OF INFORMATION 100 (Cambridge University Press 1995). 3 FED. R. EVID. 411. 4 FED. R. EVID. 403. 5 FED. R. EVID. 411 leaves no discretion to courts to decide the admissibility of evidence of insurance on the issue of negligence or wrongdoing: “evidence . . . is not admissible . . .”

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even in situations aside from far-fetched hypotheticals6—but it may also reveal that the evidence is not as prejudicial as many scholars and courts had originally supposed. As a result, Rule 411 could be over-exclusive in its application, excluding not only a wholly irrelevant part of insurance evidence—the wealth or ability-to-pay implication—but also part of insurance evidence that implies an insured’s possible subjection to moral hazard. This note discusses how the moral hazard part of insurance evidence is relevant, and how this evidence yields sufficient probative value to overcome any potential prejudice. Section II of this note explores this history and policy behind Rule 411. Section III lays the foundation for considering moral hazard, including its history, application and empirical evidence of moral hazard. Section IV contains the main contention of this note, explaining how moral hazard considerations can undermine the policies upon which Rule 411 is based. Section V considers the probative value of a moral hazard inference, diverting attention to a possibly competing inference that comes from what a factfinder might infer about the character of an insured or uninsured individual. With the

probative value of the moral hazard inference observed, Section VI turns to a reexamination of any prejudicial effect that might result from the introduction of evidence of insurance, before this note concludes with Section VII. II. THE HISTORY AND POLICY OF RULE 411 Included in the preliminary draft of the Federal Rules of Evidence proposed in 1969,7 Rule 411 codified the common law8 exclusion of evidence of the existence or non-existence of liability insurance when the proponent offers such evidence to show that a person was negligent
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While driving is an insured activity that may be easiest to imagine, this note also explores how evidence of insurance could be relevant for defendants with other types of insurance, such as health insurance, or for defendants with an absence of insurance. 7 Preliminary Draft of Proposed Rules of Evidence for the United States District Courts and Magistrates, 46 F.R.D. 161, 242 at Rule 4-11 (1969). 8 Alan Calnan, The Insurance Exclusionary Rule Revisited: Are Reports of its Demise Exaggerated?, 52 Ohio St. L.J. 1177, 1177 (1991); see also e.g., Barsema v. Susong, 156 Ariz. 309, 312-13, 751 P.2d 969, 972-73 (Ariz. 1988) (reciting a history of state cases that contributed to the development of Rule 411).

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39. and therefore applies Rule 403 to determine whether evidence of insurance was proper before the jury). 589 P. the more general exceptions codified in Rule 411 slowly developed. v.2d 202 (5th Cir. 155 F. 92 N.”14 A minority of courts. L. 1965) (allowing plaintiff’s counsel to illicit testimony regarding the bias of the witness). 13 M. 351 F. as a ground for a new trial. Inc. 5 .. where even the mere mention of the word “insurance”9 —a kind of bete noire—was “something to be avoided by witnesses and the court at the peril of withdrawal of a juror or.”10 Eventually. 30 F. Heuss v.. See e.11 The exclusions may have chipped away at the overarching exclusionary rule of old. 1967). 448.. 1039 (N. courts began to grind down the rule’s exclusionary teeth as certain exceptions to the blanket exclusionary rule developed. supra note 8. 5 U. See e. Borandi. moreover. the precedent began with even stricter restraints. 12 The insistence with which courts have applied this rule. 495 F. 1974). at 1178. availing themselves a “great deal of discretion”15 with respect to the exclusionary rule. And while the rule as presently codified calls for strict exclusion of evidence of insurance on negligence issues. v. as critics have piled on an “avalanche of authoritative criticism”13 that questions the need for maintaining a rule based on an “archaic legal principle. v. Universal Carloading & Distributing Co.2d 342 (6th Cir. 1979) (where the court recognizes that the question of insurance can also be “proper and dignified” before a jury. 1946) (rejecting a court’s responsibility to declare a mistrial after insurance had been mentioned and instead permitted the introduction of insurance to show witness bias). Coble v. 1936) (holding that evidence that a company carried liability insurance was admissible to demonstrate agency). McCoy v.g. Kan.or that she otherwise did some wrong. at 713. 375 F.Supp. These courts.g. Rev. Inc. have to some degree echoed the critics. 82 F.2d 478 (5th Cir.M. Rockwell Standard Corp. 14 Id. Complete Auto Transit. has not been without condemnation. Ingalls Shipbuilding Corp. Trehern. Slough. Eventually. 40 (N. later. but yet unmarred is courts’ rejection of evidence of liability insurance offered on the issue of fault. have refused to exclude evidence of 9 See e. Relevancy Unraveled. Tex.g. Phillips Petroleum Co.D. 675. Wayne Broyles Engineering Corp.. as proponents maintain that the rule still serves some benevolent purpose.2d 265.M.2d 1037.C. 12 Calnan..2d 1207 (6th Cir. Vigil. 270 (3d Cir. 446. 15 Mac Tyres. 711 (1957). unexpectedly or incidentally be introduced. 11 Courts began to back off the strict prohibition of the word “insurance” as they realized the word would sometimes voluntarily. however. 1939) (where the court ordered a new trial after the mere mention that the defendant carried insurance was imparted to the jury) 10 Corbett v.

Prac. 856 (1977). 402. except the flimsy one that a man is more likely to be careless if insured. WALTZ. 19 Corbett.S.”22 By insisting that the relevance of insurance could only be derived from an irrational reveling in “self-destruction”23 and from courting “careless”24 conduct. (1975) 25 In Brown v.2d 823. 434 U.17 Courts and legislature rely. 17 Mac Tyres. 155 F. 375 F.2d at 204. R.2d at 268. 604 P. however. EVID. THE NEW FEDERAL RULES OF EVIDENCE 38 2d ed. on two fundamental reasons for the persistent exclusion of evidence of insurance. The claim continues: an inference of fault drawn from the presence of insurance coverage—and.” FED. §5362 (1 st ed. critics may be overlooking the possibility of a more subtle influence on insured individuals.M.M. 92 N. 20 Ingalls Shipbuilding. 62 F.” Id. 411 advisory committee notes. supra note 13. Evid. 22 Charter v.. 26 Id. cert. to a simple reliance on Rule 403 to balance the evidence’s effects.”26 The belief is that “knowledge of [insurance’s] existence 16 Grammer v. 6 . 589 P. Opponents of insurance as evidence contend that evidence of the existence or non-existence of liability insurance has no business in the courtroom18 as it has no “relevancy”19 or even any “connection whatsoever”20 to the issue of liability.M.) citing JON R. Walter. at 711. R. at 800.2d 246. 691. 685. 47 N. Judge Learned Hand claims. 1977).2d 585 (N.insurance because of reasons ranging from belief that the rule rests on “fictitious”16 beliefs about the effects of such evidence. 143 P. Kohlhaas Tank and Equipment Co. an inference of non-fault from the lack of coverage—is “tenuous”21 at best with only “questionable probative value. 1979) citing Olguin v. 377. The second underlying rationale for the exclusionary rule is as follows: the probative value from such a “flimsy”25 proposal—that an insured individual would immediately abandon all care upon obtaining insurance—is allegedly “much more than outweighed by the probability that the real issues will be obscured. 93 N. similarly. at 448. 18 These opponents would contend that it has no business in the courtroom because of its irrelevance. 1943). EVID. That is at most the merest guess. “There can be no rational excuse [for admitting evidence of insurance on the issue of negligence]. much more than outweighed by the probability that the real issues will be obscured.M. 551 F. 829 (N. App. Chleborad. 1933). 23 Slough. denied.2d at 1039.2d 798 (2d Cir. 248 (8th Cir. & Proc.M. as “evidence which is not relevant is not admissible. Thygesen. 21 FED. 24 23 Fed.

2d at 800. at *3 (Ohio App. 328. 1686 PLI/Corp. (Practicing Law Inst. WD-81-16. 439. however. 29 Ogle v. 6 Dist. 329 (1936-7).A. making it even harder for jurors to base their decision “on the real issues. 33 Maxwell V. at 454 32 Brown. 6. C.2d 775. 7 . Van Schaik.A. L. 15 Neb. The Present Rule as to Disclosure of Insurance in Personal Injury Cases. 6 Dist. 2008) (PLI Order No. 62 F.g. 1965). But even those30 who acknowledge that jurors may already be aware of the prevalence of liability insurance and the high probability that parties are insured still fear that mentioning insurance would “invade”31 the jury’s determination of liability. 1981 WL 5867.. 14310). Inc. Bull. the foundation for liability would accordingly shift away from considerations of duty and toward a knowledge that “recovery will be paid by an insurance company. Beghtol. Securities Arbitration and Insurance: When Worlds Collide. Bull. is fallibly founded on the unrealistic belief that introducing insurance in the courtroom will blow the jury away by opening to them a brand new and previously unseen world. Van Schaik. Clint A. C. NO.”34 This fear extends to both generous juries that would award “extravagant verdicts”35 because a defendant has insurance. L. 31 Id. 18.”32 Exaggerating the possibility that insurance would cause jurors to lose focus of the real issues to instead decide verdicts on an “extraneous ground such as wealth”33 or insurance ultimately leads some writers to fear that “justice as administered by our courts [would be] impotent and might result finally in the entire destruction of our present judicial system.. 347 F.”27 Because of the “prejudicial and inflammatory effect”28 allegedly inherent in evidence of insurance. Inc. 15 Neb. 30 See e. Dec. Bassett Furniture Industries. 34 Maxwell V. 328. 18.”29 Much of this criticism. 782 (3rd Cir. Beghtol. Dec. 35 Kiernan v. The Present Rule as to Disclosure of Insurance in Personal Injury Cases. 347 F. Corrie. 1981). Bassett Furniture Industries. WD-81-16. 1965) Ogle v.2d 775. 329 (1936-7). at *3 (Ohio App. NO. and also to stingy juries that might go easy on an 27 28 Kieman v. 781 (3rd Cir.would overthrow the requirement of fault as the foundation for negligence liability. 1981 WL 5867. 1981). Aug.

As later studies as those cited in Section VI of this note would reveal. researchers changed what the jury heard with respect to the defendant’s liability insurance: the jury either heard testimony that the defendant had no insurance. the earlier studies’ findings would not stand the test of time. 744 (1959). At least earlier37 in the development of the rule. 1388 (Pa. Rule 411 continues to exclude evidence of insurance. L.”42 By these two policy reasons—relevance and prejudice—has evidence of insurance been barricaded from introduction into the courtroom on the issue of negligence or wrongdoing. Rev.38 for example. however. 149. 39 Dale W.g. Broeder described this study in The University of Chicago Jury Project. 38 Neb. In a study performed at the University of Chicago.insurance-less defendant. after which the jury heard defense counsel’s objection and the court’s instruction to disregard the insurance evidence. Broeder. ceteris peribis. researchers recorded a mock trial based on an actual personal injury trial and played the recordings to experimental juries. … that where they know defendant is insured and a fuss is made over it the verdict will be higher than when no such fuss is made. or that the defendant had insurance. 37 Studies like the University of Chicago study were conducted in the early. 164. 36 The fear that showing a defendant has no insurance would be prejudicial is similar to the fear that showing a defendant is impoverished would have the same effect. 42 Id. L.36 And so with the present judicial system at stake. that the defendant did have insurance. 8 . v. as perhaps widespread knowledge of the presence of insurance increased with time. the highest amount of damages. Bybel.. 40 Id. on average. its supporters validated their argument with empirical studies.Super. The University of Chicago Jury Project. 1990). Com. 399 Pa.39 Of the study’s variables. 38 Dale W. See e.Super. 41 Id. and.41 The researchers thus concluded that “juries tend to award less when they know that an individual defendant is not insured. Rev. the jury awarded the lowest amount of damages on average.to mid-twentieth century and uncovered empirical evidence supporting the hypothesis of prejudice. 38 Neb. 581 A.2d 1380.40 The results indicated that if a jury heard that a defendant had no insurance. while the jurors that heard testimony of insurance and the subsequent “fuss” regarding such testimony awarded. 744 (1959).

S. Risk & Ins. the employee freely shifts her behavior to reflect the liberty of life on the company’s dime. Schwartz. Rev. 257 (1972).Much of whether moral hazard considerations are able to conceptually hurdle these barricades turns on what moral hazard even means.2d at 800. supra note 45 at 257. she has temporarily moved beyond the constraints of her own wallet and adopted the more expansive budget of her employer. This is moral hazard. 75 Cornell L. 47 Joseph.2d 169 (2d Cir. MORAL HAZARD: MORE THAN A MERE GUESS To Judge Hand. that an individual would change their behavior because of the presence of insurance represented no more than only the “merest guess. this otherwise thrifty traveler eats more and eats better. lodging and food costs for the duration of this employee’s trip.”47 In other 43 44 Brown. Moral Hazard: What is it? Consider a typical penny-pinching person who leaves on a business trip during which the company agrees to pay travel. 62 F. Judge Hand developed the economics-based landmark theory for negligence in U. The Ethics and the Economics of Tort Liability Insurance. Because the company is compensating the employee consumption. The Measurement of Moral Hazard. 9 . And if it does have the explanatory power this note contends it has. 159 F. why would an economics-savvy44 Judge Hand have failed even to mention an economically-based theory about the effects of insurance? A. Carroll Towing Co.. III. 313. Unconstrained. and finds her way into more luxurious lodging. Scholars pin moral hazard to a more specific definition. calling it generally a phenomenon that “lowers costs”45 or otherwise “releases an insured from cost constraints”46 so that the insured consequently changes her behavior by “increasing the usage of [insured] services.”43 The question addressed in this section is how this theory could be anything more than just that—a mere guess about the relevance of insurance. v. 46 Gary T. 1947). 39 J. Lapping up the life of liberal spending. 257. 338 (1990). 45 Hyman Joseph.

Econ. Rev. FN45 (1990). rev. Insurance companies—justifiably disfavoring these propensities because they are those to whom the costs of the “produced losses” are shifted—have similarly confused this concept with an intentional change of behavior that amounts to “malingering” or even “fraud. 129. 10 .”49 True. HEALTH INSURANCE 463. a company paying for its employee’s business-related expenses is not a typical “insured service. Econ. 138.words. that insureds sometimes engage in because they are insured. Cost constraints can keep people honest—by having full responsibility and accountability in bearing 48 Mark V.” but it is not too hard to imagine a similar situation where insurance results in similar shifts of behavior. the insured is spending money that would not otherwise be spent.50 But what critics and insurers seem to misunderstand alike is that moral hazard is not necessarily a conscious choice to abandon all care. Pauly. Pauly. In contrast. by shifting behavior to more costly choices.”48 In the example above. The Economics of Moral Hazard: Comment. citing O. Logue. Consequently. 531. Rev. The incentive to change behavior stems from the removal of cost constraints.”51 It is simply rational for any utilitymaximizing-but-cost-constrained individual to take advantage of the removal of costs that open opportunities to increase consumption and thus utility. supra note 49 at 535.” Jon D. 535 (1968). 58 Am. 50 “Moral hazard also includes more deliberate acts. DICKERSON. 76 Cornell L. 51 Pauly. ed. The Economics of Moral Hazard: Comment.D. such as arson or suicide. other scholars have also identified moral hazard as “the intangible loss-producing propensities of the individual assured. there are those obvious. what many have found hard to believe is that an insured individual has the propensity to produce losses without making conscious and calculated choices to recklessly abandon all care. 58 Am. Rev. 531. The First-Party Insurance Externality: An Economic Justification for Enterprise Liability. The hypothetical driver in the introduction section that avoided uncovered water damage to smash instead through a house might be an illustration. Hanson & Kyle D. but still rare cases in which conscious choice is the sole cause of loss. 1963 (emphasis added). but rather is a response to incentives that merely represents “rational economic behavior. 49 Mark V. 535 (1968).

http://findarticles.55 but also in areas such as health insurance. however.”54 which indicates that moral hazard can be buried in the subconscious—not the calculated and conscious—realm. 54 Neuroeconomics. supra note 2 at 100. J.g. . at least hypothetically exercise greater caution when choosing how to drive.. on an assumption that there is no moral hazard in insurance. where he argues that because driving is automatic. etc. who would.g. Risk & Ins. Kuniyoshi 11 . When that driver purchases insurance. while adding little to his welfare when losses due to carelessness or bad luck are covered by the insurance contract. (2008). Wang et. fashions and hysteria. page X. Economists have discussed possible moral hazard effects asserting influence in the frequently-observed automobile insurance market.. but see this. drivers would not respond to the presence of insurance. But with the constraints’ removal. accidents.”53 Such a rational response could reveal itself not just in “careful and accurate hedonic calculations” to drive up an insurer’s costs. In the case of driving.56 title insurance57 and 52 53 Id. an individual’s incentives to avoid those costs also diminish. if this incentive is imbedded in each individual’s “complex of reflex actions” and “impulses” that the autonomy of driving already included moral hazard’s effects? 55 See e. however. customs. al. theft or other damage are incidents that impose costs on an uninsured motorist. habits. individuals have incentives to ensure their actions will not give rise to excessively costly consequences. Campbell. as a result.52 The diminished incentive to exert care exists especially because exerting preventive care “is costly to the individual . Jennifer L.. break-ins. In this assertion. and the insured therefore has less incentive to exert the care it takes to avoid those cost-producing incidents (e. . He bases this argument.the total costs of their actions.com/p/articles/mi_hb6645/is_3_75/ai_n31345110. that “driving is automatic” he also assumes that there is no decision-making in driving. An Empirical Analysis of the Effects of Increasing Deductibles on Moral Hazard. Moral hazard as a subconscious reaction could possibly thus present itself much more universally and in many more ways than legal scholars seem to have considered. impulses. Isn’t it possible. the costs of those incidents—outside deductibles and premiums—are shifted to the insurer. where to park. for example. but also in a “complex of reflex actions. accidents).

Identifying Moral Hazard: A Natural Experiment in Major League Baseball.sewanee.g. at 2 FN1. Coble et al. Econ. 335 (2006).. supra note 2 at 101. 60 John Charles Bradbury & Douglas Drinen. at 1. Bradbury and Drinen explain that pitchers in the major league baseball’s American League face greater incentives to hit batters because the costs of a retaliation possibility are shifted to a designated hitter—the individual that replaces a pitcher in the batting lineup. Keith H. J.g. economists have sought to confirm the presence and scope of moral hazard with empirical analyses. Empirical evidence. where one economist hypothesized that even major league baseball pitchers submit to a moral hazard influence. Inspired by the importance to insurance companies and policy-makers alike. 56 See e. Testing for Adverse Selection and Moral Hazard in Consumer Loan Markets.federalreserve. 216 (1997).61 Another economist suggests that moral hazard effects can be as subtle and commonplace as the choice to put a house key under the front door mat. 12 . Empirical Evidence of Moral Hazard Identifying hypothetical circumstances in which moral hazard operates is one thing. 59 BERNARD SALANIE. actually finding empirical proof is a wholly separate yet crucially important consideration. 61 Id. Joseph. or the decision to burn leaves in a driveway adjacent to the house. And moral hazard does not just stop with insurance markets: because moral hazard is a phenomenon that results when general “cost restraints” are shifted away from an individual. An Expected-Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance. economists find individuals reacting to these shifting costs in many other circumstances where individuals are otherwise shielded from the costs of their actions. 57 See e.gov/pubs/feds/2004/200409/200409pap.59 One such principal-agent relationship60 susceptible to moral hazard is found in the world of sports. Risk & Ins.. 2004-09). Agric. Testing for Asymmetric Information in the Automobile Insurance Market Under Rate Regulation.pdf. confirmed that American League pitchers actually do respond to Saito. 79 Am. Wendy Marianna Edelberg. Economists hypothesize that agents shielded from the supervisory glance of a principal may be subject to moral hazard.62 B. 58 See e.edu/Plunk/dhpaper.g.even crop insurance58 markets. available at http://www.. available at http://ddrinen. THE ECONOMICS OF CONTRACTS: A PRIMER. (FEDS Working Paper No. (July 2004). supra note 45.. 62 Campbell. 73 J.pdf. for example. 107-109 (MIT Press 1997).

Working Paper No.org/papers/w12445. Both adverse selection and moral hazard would theoretically influence an insured individual’s consumption choices.65 The automobile insurance industry. 2006) available at http://www. Joseph. 1986). 197. see Wang et. Adverse Selection and Health Expenditures: A Semiparametric Analysis (Nat’l Bureau of Econ. conservatively concluded that a hypothesis of moral hazard in the automobile insurance market “cannot be rejected. citing RICHARD A. POSNER. supra note 60 at 1. instead of consuming more simply because of insurance. One study skeptically concluded that moral hazard was present only to a “limited extent. with the most significant market with regards to litigation. 13 . it is said a hypothesis cannot be rejected when analysis reveals a significant enough of a correlation between two variables such that the hypothesis could be true according to the regression model. have long confirmed that patients with insurance consumed more health services64 because of a moral hazard effect. supra note 45 at 257.. supra note 55.pdf. 12445.. & Stat. Moral Hazard.” Hanson & Logue. but the effects would be at odds with each other. While moral hazard proposes that an individual would consume more because of insurance.nber. ECONOMIC ANALYSIS OF LAW 186-7 (3d ed. al.63 Empirical studies of the healthcare industry.decreased incentives associated with moral hazard to more frequently bean batters.. 69 Statistical significance indicates that a variable has some appreciable explanatory power in the dependent variable. Econ. finding a significant69 correlation between insurance coverage and risk-taking. supra note 55. 66 Moral hazard effects in the automobile insurance market would be most significant to civil litigation because “automobile accident cases constitute the most frequent type of negligence case.67 Outcomes of the automobile insurance market studies have varied.72 Comparing drivers with policies that increased deductibles after a claim—Type A drivers—with those who enjoyed the same deductible independent of the claims they made—Type C drivers—the study found that Type A 63 64 Bradbury & Drinen. al. 67 For a brief introduction to the myriad of empirical studies on the automobile insurance market. Research. 70 Using regression analysis. 68 Saito. supra note 55 at 335. supra note 50 at 192. 87 Rev. moreover. 65 Scholars have notably aimed studies at disentangling moral hazard from adverse selection effects. 198 (2005).66 has been the focus of many empirical studies. Separating the moral hazard effect from that of adverse selection further strengthens the case for the presence of moral hazard. 71 Alma Cohen. for example—it is the inherently unhealthy consumers that purchase more insurance and thus would already have the tendency to consume more. 72 Wang et. Asymmetric Information and Learning: Evidence from the Automobile Insurance Market.”68 while another study. See Patrick Bajari et al.”7071 Yet another study observed how drivers responded to deductibles that would increase with the occurrence of accidents. adverse selection theory posits that—in the case of healthcare.

167. 77 For a summary of main arguments lodged against Rule 411. and thus reinvented incentives for these drivers to drive more carefully to avoid the costs of accidents. if any. Maine Evidence. & Proc. §5362 (1 st ed. 14 . Why Moral Hazard Has Not Been Considered With documented evidence of moral hazard and the hypothesis that an insured individual may even subconsciously react to decreased incentives to exercise care.” 74 For Type A drivers. Evid. Instead. the authors inferred the presence of an underlying cause rooted in changes of driving behavior. 75 Id. p. Id. They concluded that increasing deductibles reduced the moral hazard effect. Prac.75 C.) citing Field & Murray. see Relevancy and its Limits in the Proposed Federal Rules of Evidence.”76 The fact is that few.drivers who had filed a claim were less likely to file another claim than were those of Type C. one may ask why scholars considering insurance as evidence have so hastily dismissed the theory as being “absurd. consideration of moral hazard seems to be completely void from the insurance evidence literature. Rev. writers have taken a serious look at this phenomenon when considering insurance evidence. in other words. 76 23 Fed. driving negligently was becoming more and more expensive as the increased deductibles exposed them to a greater portion of the costs of their driving behavior. 73 From the changed claim-making behavior. and thus “[provided] a stronger incentive for drivers to drive more carefully. critics of Rule 411 have focused more of their attention on explaining away any alleged prejudicial effect that would result from the introduction of insurance evidence. Perhaps one reason that can explain this 73 74 Id.77 But if moral hazard theory asserts a position directly at odds with the underlying rationales of Rule 411. 1976. 16 Wayne L. why would critics of the rule not add this theory as yet another reason for which Rule 411 did not make sense? Indeed. 193 (1969).86.

validation from empirical studies still lagged behind. the lack of adequate data sets. Econ.g. Pol. being at least introduced as early as 1921. Rev. Mark V. began to explore modern applications and implications of moral hazard. The Economics of Moral Hazard: Comment. Kenneth J.78 Perhaps if moral hazard had experienced the development it currently has. 249. Uncertainty and the Welfare Economics of Medical Care. Regardless of the reason for which moral hazard has yet to claim stake in the discussion on the admissibility of insurance. supra note 55.79 Now. Testing for Asymmetric Information in Insurance Markets. See e. Kenneth J. Arrow. among other influential economists. while headlining economists did not start developing moral hazard until the 1960’s. UNCERTAINTY AND PROFIT. Arrow. 53 Am. But even after moral hazard was theoretically explored. 56. The Economics of Moral Hazard: Further Comment. 531 (1968). after economists have performed many empirical analyses of moral hazard. courts have documented their disdain for insurance evidence since the early 1900’s. 15 .. See Wang et. However.. there was already well-settled legal precedent that disfavored evidence of insurance. 537 (1968). By the time moral hazard was making its way into prominence in economics literature.80 This may explain why such a then-cutting-edge theory would not have been able to make its way into the insurance evidence literature. still lagging behind is unanimity regarding the extent of moral hazard effects. 108 J. 58 Am. other social changes since the crafting of the rule—such as the growing prevalence of liability insurance—may change 78 Moral hazard did have its beginnings earlier in the twentieth century. 79 Pierre-Andre Chiappori and Bernard Salanie provide several explanations for the empirical lag behind theory development. it is at least clear that the theory has now received the attention and scrutiny that can allow it to form a credible basis for arguing that the exclusionary rule should be reconsidered. it was not until the 1960’s when Nobel-prize winning Kenneth Arrow. 56-57 (2000). for example. 941 (1963). See Pierre-Andre Chiappori & Bernard Salanie. 58 Am. Pauly. al.dearth stems from the timing of moral hazard’s development. KNIGHT. Rev. Rev. RISK. it would have received more attention as the legal rules developed. Indeed. While the development and exploration of moral hazard can enlighten the view of the relevance of insurance evidence on the one hand. briefly discuss the studies that have looked for asymmetric information and the varied results of those studies. 80 Jennifer Wang et al.. and why courts would not likely have given much credence to a little-explored and even less-proven hypothesis to overthrow time-honored precedent. Econ. including. 251 (1921). Econ. See FRANK H. Econ.

IV. the discussion will now turn to a more detailed treatment of how moral hazard would affect Rule 411’s foundational policies of relevance and prejudice. reconsideration of Rule 411 would reveal that the foundations of the prohibition of insurance evidence—irrelevance and prejudice— do not merit the same credence as they did when the rule was crafted. may admittedly be slight. This is so especially if moral hazard provides additional probative value to evidence of insurance. Therefore. because it thus becomes less likely that any prejudicial effect will outweigh the probative value. Having provided a background for both the exclusionary rule and the theory and evidence of moral hazard. nor is it reasonable to expect that moral hazard could be a gamechanging consideration for any jury debating negligence or wrongdoing.prejudicial implications on the other hand.81 And even though this theory relies heavily on what some consider unsettled empirical evidence. it would be such a “tendency” under this rule nonetheless. 401. THE RELEVANCE OF MORAL HAZARD A. The Federal Rules of Evidence make it clear that evidence having “any tendency” to make the existence of a material fact more or less probable is relevant. Moral Hazard Passes Relevance’s Low Hurdle It is not expected. R. Thus. peer-reviewed empirical studies that document the existence of moral hazard in automobile insurance and other markets should at least be 81 FED. the fact that there have been credible. These rationales have long since been far from well-settled foundations for the exclusionary rule anyway. moral hazard should not have to have some substantial bearing on materials issues before a jury may consider it. moral hazard is not likely to make up a substantial part of an individual’s behavior equation. But according to the rules of evidence. so moral hazard may be able to settle the score. 16 . and hesitance among the courts is therefore understandable. the effects of moral hazard. considered in detail infra. Especially considering its subtle effects. EVID. Even if some tendency was slight.

Procter & Gamble Mfg. it may have been “somewhat tenuous. this in and of itself would not be enough to defeat admissibility in court. FED. should be admissible because it is "the privilege of the jury to believe the unbelieveable if the jury so wishes.S. 17 . A proper approach would then be to leave the issue of believability to the jury: 82 83 Slough. March 22. 84 Some courts have admitted evidence though.” See e. 1983) (emphasis added). They would prefer instead to invade the province of what they must presume is an incompetent factfinder. NMCCA 200600728. 86 Slough.2d 613. 2007). 87 The Supreme Court of Kentucky has held that evidence.App. it is not within the purpose of the rules of admissibility to shield the jury from evidence that the judge. v.J.g. 556 S. in the courts’ opinions..84 This is true especially because the Federal Rules of Evidence not only set the hurdle for relevance at a very low level.W."Mishler v.M. 85 “It is … the general policy of the Federal Rules to favor the admission of relevant evidence.. if courts were to make findings on the basis of evidence’s believability. no matter how absurd the evidence may seem to the court. in her opinion. R.. advisory committee notes. 724 F. Indeed.Ct.. “it is the privilege of the jury to believe the unbelievable if the jury so wishes. 1977). supra note 13 at 710.S. 627 (8th Cir.86 The fallible argument that what some may consider preposterous evidence has no place being heard in a courtroom should not succeed because.S. U. EVID.85 In seeming disregard for the liberally admissive policy. 680 (Ky. v. 190 (U. Com. But even if the best that moral hazard could muster was a mere “tenuous” relationship between insurance and liability.” Kehm v. Harrow. Co.Crim. disbelievers would quickly dismiss the possibility that insurance could be relevant. 411. it would effectually eliminate the need of a jury altogether.enough to dismiss assertions that moral hazard is merely a “slight danger”82 that leads to only a tenuous83 connection between insurance and behavior. Shaw. and avoid wasting the time it would take them to consider evidence they would unlikely be “hoodwinked into believing” anyway. absent an extremely strong showing that admission will lead to unfair prejudice. 2007 WL 1701709 at *6 (N. finds hard to believe.2d 676. 65 M. regardless of the fact that the court found it preposterous. 2007). but also because the rules tend to favor admission. See also U. supra note 13 at 710.” 87 After all. Armed Forces.

responding to the statement. 432 U. “Don’t worry. 91 FED. You may have an accident. supra note 13 at 711. Applying Moral Hazard With the standards of relevance in mind.92 or an insured driver who erroneously believes that he can drive more carelessly because he “[carries] insurance for that”93 provide clear examples of individuals who consciously surrender to moral hazard and embrace the opportunity to increase their own utility at the expense of insurance companies.” 94 Slough. it was insurance’s influence that dictated this driver’s decision to drive into the homeowner’s property. that insureds sometimes engage in because they are insured.H. 80 N. I carry insurance for that. Thatcher. 92 “Moral hazard also includes more deliberate acts. “You ought to be a little more careful about [driving].” the defendant quipped.S.” Hanson & Logue. not to its admissibility or relevance. 401. 89 The Supreme Court has given great deference to juries as factfinders: “We are content to rely upon the good sense and judgment of American juries. An insured homeowner who intentionally torches her home.whether the factfinder believes certain evidence—even “tenuous”88 evidence—to be true does not bear on the admissibility of that evidence. but rather bears on the weight89 the factfinder gives it in decision-making. 93 In Herschensohn v.. 1923). 557.2d 760.” People v. such as arson or suicide.” Shaw. See also Harrow. Dismissing such selfdestruction as behavior that “hardly seems rational. FN4 (Colo. for evidence with some element of untrustworthiness is customary grist for the jury mill. 90 The jury’s province is deciding the case is not to determine whether what they heard was admissible. supra note 50 at 138. 638 P. R. 1981).” Manson v. Weisman. 705 (N. FN45.91 this evidence would likely be excluded under Rule 411. 119 A. but whether what they heard was believable: “The jury need not believe testimony found to be admissible. There are yet other blatantly obvious instances in which insurance would be an important consideration in determining liability but would nevertheless be ruled inadmissible. According to this hypothetical situation. 18 . 65 M. consider again the driver mentioned at the introduction of this discussion.J.90 B. EVID. 2007 WL 1701709. Juries are not so susceptible that they cannot measure intelligently the weight of identification testimony that has some questionable feature. You are liable to kill somebody. at *6.H. Brathwaite. 98 (1977).” 94 writers have failed to grapple with the 88 Even tenuous evidence should “more properly go to the weight the [factfinder] gave a particular piece of evidence. at 202. Though admittedly having some tendency to make the existence of that driver’s wrongdoing—the destruction of a home—more probable.

HEALTH INSURANCE 463. 19 .D. MURPHY. however. these extreme examples may add but little fuel to the fire if moral hazard is to have any chance at a reconsideration of Rule 411. PROPERTY INSURANCE LITIGATOR’S HANDBOOK 332 (2007). if the moral hazard of an insured individual produced losses. supra note 48 at 535. 1963. and is guarded against by other legal and insurance policy safeguards95 in order to discourage these types of actions. but did not give rise to liability.. insurance policies cover only fortuitous losses. After all. 401. 97 FED. supra. there are separate causes of action for intentional acts as well as criminal prosecution that would deter insureds from intentionally cashing in on insurance policies. this type of behavior may indeed be rare. ed. rev.. and whether that gives rise to liability as a matter of law so as to determine whether from the existence of insurance a fact-finder could justifiably infer negligence. But the individuals in these outstanding cases hardly represent a significant portion of insured litigants—so what about the typical insured individual in less clear-cut circumstances? And empirical evidence has shown how a typical insured individual would be prone to some moral hazard effect. “as a general matter. but can that lead to liability? The following will answer these questions. citing O. Admittedly so. As mentioned. 95 As far as legal safeguards. in order for moral hazard to truly be relevant. .e.e.. DICKERSON.consequences of such illustrations—instances that seem to glare in the face of Rule 411’s dismissal of any insurance as irrelevant. it must be uncovered why moral hazard produces losses. As far as insurance safeguards go. . ET AL.” LEONARD E.97 Therefore. But whether those losses are of the kind that give rise to a legal cause of action or liability—i. Therefore. 96 Pauly. introduction of the presence of insurance would still be irrelevant because no “material fact”—i. whether those losses stem from negligence or other wrongdoing—does not follow from the definition of moral hazard alone.96 It follows that with insurance comes a greater probability for loss. It is a basic principle that insurance policies do not cover intentional acts. R. EVID. negligence—would be rendered any more or less probable. moral hazard is defined as a loss-producing phenomenon.

supra note 55. is a cost to an individual—individual utility diminishes when the expenditure of extra resources must be diverted to exercising care (especially for society’s sake) when that individual would rather and more efficiently spend those resources for the production of other goods that might more directly contribute to his own benefit or utility. the extra time that one spends driving because she is unable to speed to more quickly reach her destination could be used by that driver in another. In light of the costs of taking precaution. Why Moral Hazard Produces Loss The question arises: “Why?” As already discussed here and by numerous scholars. Then what is the changed behavior that gives rise to the produced losses? Where does the propensity to produce losses originate? The answer is found in the effects of moral hazard. supra note 2.100 which translates into more risky behavior the costs of which the insured does not have to bear. Id. then insurance presents a diminished “incentive to invest in preventive care”99—the responsibility for reparations would no longer be keeping the actor honest.. Therefore.g. while reducing the probability of various kinds of losses. it should follow that shifting the costs of the insured service (e.C. absent unique or rare circumstances. Wang et al.. a driver is not likely to suddenly become adopt reckless tendencies because of insurance. If this is true. Empirical evidence supports this assertion.98 As a simple example. more beneficial way like working to make money. moral hazard in essence resembles having one’s cake and eating it too: insurance 98 99 Campbell. 20 . it should thus be easy to understand why insurance may result in a change of behavior. an insured is less likely to engage in “costly” caretaking. As a result. Preventive care. If taking care reduces the probability of loss—the costs of which would otherwise have to be borne by the individual who caused the loss—but insurance shifts the costs of that loss away from the actor. accidents) back onto the insured would re-increase their incentive to take care. Jennifer Wang et al. at 100. 100 Id. found that drivers do actually respond to incentives—at least in the form of increased premiums and deductibles—to drive more carefully.

when dining out with others who mutually agree. have an incentive to order more expensively than if paying for his own meal.. is essentially nothing more than a composite loss comprised of the losses associated with increased accidents or injuries. Jon D. In short. This type of aggregate loss. Hanson and Kyle D.102 And when multiple insured individuals follow a similar course of action—failing to invest in preventive care because of reduced directly-borne cost— everyone’s premium increases. The individualized losses inherent in these increased 101 Deductibles and premiums are costs that an insured would still have to pay for the benefit of having insurance. nominal increase in the amount of insurance premium she pays without being laughed out of the courtroom or sanctioned. each party ends up bearing the cost of the collective over-ordering anyway. it would follow that it would result in accidents or other costs that would not otherwise occur. and should it give rise to liability? In an aggregate sense. at 100-01. the loss that moral hazard purportedly produces comes from the reduction of activity that itself would otherwise reduce the probability of loss. Wang et al. “reflecting the substantial reduction in the community’s wealth. to split the check. If an insured neglects to take preventive steps. supra note 50 at 138.. supra note 55 (explaining that several other studies have found that deductibles may help control moral hazard. After all. but not completely eliminate it). moral hazard creates a general loss of societal welfare when the money with which an insurer pays for the costs of a carelessness-created accident ultimately comes from the pool of insured individuals. however. the increased costs that the pool of policy-holders collectively bears are coming from somewhere. D.affords an opportunity to get the utility from the risk (or decrease in care) without paying the entire101 costs for it. 21 . However. but even these costs are not prohibitive of moral hazard. if each party responds positively to this incentive. supra note 2. FN44. Logue cite a simple example of how the costs of moral hazard can be spread across multiple parties by explaining that some people. 103 Id. See Hanson & Logue. in advance.”103 But asserting liability against one who has caused a loss of society’s welfare by consuming more insurance hardly makes sense—a plaintiff can hardly claim that the defendant’s actions caused an indeterminate. at 100. then. 102 Campbell. The Kinds of Losses Created and Whether Those Losses Give Rise to Liability But what kinds of “losses” does moral hazard create.

excessive speeds or a tendency to run red lights that causes accidents with other vehicles.105 Suppose that an accident and injury to a certain individual can be avoided by the actions of another driver. for example. D. resulting in a robbery.104 expressed by: B < P x L. would a jury not be justified in inferring that the fact of negligence or wrongdoing is more probable than without such an incentive? The connection between the change of circumstances because of insurance and the liability that could be attached to corresponding incentives can be made more apparent by considering Judge Learned Hand’s theory of negligence. P = the probability of the loss and L = the magnitude of the loss. 105 22 . But these victims arguably do not actually bear these losses to the extent that these injuries are fully compensated through insurance or litigation. an individual has a duty to invest in precaution when the burden of doing so is less than the expected cost of the accident. if D. According to Judge Hand’s theory. Moreover. In Judge Hand’s equation of negligence. Bystanders may suffer a loss as the victim where an insured’s diminished incentive to exercise care translates into. ECONOMIC ANALYSIS OF LAW 167 (Aspen Publishers 2003). but still reprehensible responses to incentives should not overshadow the fact that injuries are occurring with increased frequency—certainly something that could give rise to liability. the final loss would be borne by the insureds because it is they who must pay their own increased premiums and deductibles to compensate either their own loss or that of a third-party’s.accidents or injuries are possibly borne by either bystanders or the insured herself. This is because the insureds themselves actually bear the final losses. were 104 RICHARD A. POSNER. if an insured has an insurance-rooted incentive to increase their own utility by decreasing the amount of care they exercise. for example. but ultimately. This could be in the form of the failure to preventively secure one’s insured property. The fact that insureds—instead of the victims—are paying for the losses caused by their own rational. B < P x L. B = the burden of caution.

or an expected judgment cost of $10. “liability depends on whether B is less than L multiplied by P.110 In deciding liability. 109 Posner. If P remains . is .2d at 171. for an expected cost (P x L) of $10. L. as in this case.106 Assume the probability of the accident’s occurrence. Further assume that driving the speed limit to avoid the accident requires an investment of $8.000. so D’s expected cost of the accident is now a meager $0. D now considers that she must only pay the cost of the deductible at $500 in the case of an accident. 110 For simplicity’s sake. would be $10. however. legal error.001. 159 F.000. Although efficiency would require the investment of $8 to avoid spending $10. 108 According to Judge Hand. D will not do so. and accordingly chooses not to invest the now-more-expensive $8 precaution. though it still requires an $8 investment. but this incentive may also ultimately give rise to liability. P. Posner. by definition of the economic theory of negligence. It thus appears that the losses brought about by moral hazard not only originate in the diminished incentive to take care.108 D will expend the $8 investment in precaution to avoid the legal damages of $10.000—D only considers the cost that she herself must bear. 107 Id.50. Would D shift behavior if she was subject to a moral hazard effect? Suppose now that D carries an insurance policy that insures losses of up to $50. and the costs of the accident.000—clearly exceeding the liability he would otherwise face—with the payment of a $500 deductible. supra note 103 at 167-68. A 106 The numbers and figures are for illustration purposes only. D has breached its duty of care and would be liable for negligence.107 But because of the legal duty imposed when.109 D is thus apparently better off by investing in precaution.001. B < P x L. While the costs of the accident remain the same—$10. mental and other miscellaneous costs that may be associated with an automobile accident. courts assess reasonableness based on the total costs of the accident—not on D’s internalized costs—and.to drive more slowly. for an individual savings of $2. supra note 103 at 167. 23 . and are adapted from an example Judge Posner uses in his textbook. this illustration ignores legal expenses. without legal liability.” Carroll Towing.

courts have not excluded from courtroom consideration. Consider. EVID. it shifts financial responsibility for some cost from the indemnified individual to the one who indemnifies. However. R. may not be readily apparent to anyone who lacks understanding of moral hazard and its implications. they may also see how comparable this part of insurance is to the same parts of other cost-shifting. Incentives as Relevant Evidence in Cases Other Than Those Involving Insurance Drawing the inference of negligence from the existence of insurance.111 E. and have consequently failed to notice the part of insurance that actually has a relevant bearing on the issue of liability: the underlying incentives. may not have that much bearing anyway. perhaps because of a lack of wealth implications. an indemnity agreement. More importantly. while possible. Indeed. though. The role of moral hazard is then to draw out insured individuals’ incentives as the relevant part of insurance and thereby push aside the implied money issues that. there is no rule explicitly prohibiting the introduction of evidence of indemnity agreements. incentives part of evidence of insurance. 401. they would be able to at least see the relevant. Without considering moral hazard. therefore. incentive-creating mechanisms that. therefore.jury. So if courts were to consider insurance within the moral hazard context. 24 . Indemnity agreements operate similar to insurance contracts because. courts and scholars blinded themselves with a focus on the wealth and payment implications of the introduction of insurance evidence. such an inference went relatively unnoticed through the history of considering Rule 411. for example. would indeed be justified in inferring a higher—albeit slight—probability of negligence from the existence of insurance. and courts will consequently 111 FED. and would therefore be relevant on its face. at its core. as will be explored in Section VI.

Brocklesby v. 111 Hawai’I 144. In reference to a state’s indemnity agreement.3d 377 (Haw. 776 P. 119 Harv.. Korean Air Lines Co. for example. Despite the harmless consideration of such evidence.allow such for a variety of purposes...2d 315 (Ak. Inc. freed from liability for certain actions.3d at 391. is one among several other courts114 that has considered and based decisions at least partially on the incentives associated with indemnity agreements. 351 F. While this may be true. whereas an indemnified organization may not face the same deterrent effects from the possibility of endangerment.2d 1288 (9th Cir.. Alaska Airlines. 1463 (2006). a driver. an indemnity agreement may create the risk for moral hazard.112 Also similar to insurance. Are the insurance-created incentives too much unlike117 those created by an indemnity agreement that courts refuse to see 112 See e. indemnified individuals or 25 . 767 F.S. the current controlling evidentiary rule would likely forbid any court from so venturing. v. 117 While the incentives underlying an indemnity agreement and an insurance contract may be similar.g. Inc. the state’s inactions do not endanger the state in the same way that an insured’s responses to her incentives would endanger the insured..g. because of moral hazard. courts openly considering the incentive implications of an indemnity agreement—which is what this note proposes for insurance—is a situation that is not so far-fetched. at 158. 1985) (introducing evidence of an indemnity agreement to show a relationship among parties).2d 253 (9th Cir. and. indemnified parties have incentives to be more aggressive in certain actions. 1445. 140 P..115 The Haole court noted that a state’s indemnity agreement requiring permittees to indemnify the state for losses could actually diminish general safety because the state would have less incentive to avoid negligence.116 While the ultimate issue of liability in Haole may not have turned on the incentives the indemnity agreement created for the state. the case nevertheless illustrates a court’s harmless consideration of the same incentives that. may subject themselves to a greater risk of personal harm or death. for example. Ltd. L.g. State. 114 See e. 140 P.. however. insurance creates for insureds. this discussion does concede some notable contextual differences. Rev. State. U. Note. Indeed.113 With no exclusionary rule in its way. By responding an incentive to reduce care-taking. 113 See e. for example. State v. 115 Haole v. Haole v. 1989). 2006) 116 Id. 1965). Northwest Airlines. A Law and Economics Look at Contracts Against Public Policy. evidence of an indemnity agreement offered to show such an incentive has already overcome one of the biggest hurdles of admission.

121 Though courts as Corbett. 1998). King. 12 (2009).g. The court also held that the probative value of such evidence outweighed any prejudicial effect. See e. 1.123 Courts have perhaps treated incentives coming from insurance differently because insurance is also unique in its relationship to money and a party’s ability to organizations.g. See e. Montell N..V. like. courts have at least yet to address such a concern. Gordon Smith & Brayden G.D. Esensten. the risk of tarnishing one’s name after consistently being associated with accidents and injuries.Supp.2d 130. 132 (Minn. 122 The moral hazard effect as demonstrated in this discussion could provide the plausible link between the incentive and the result for which courts have looked in order to admit evidence of the incentive. if the defendant-employer in a hypothetical wrongful termination suit offered evidence of the plaintiffemployee’s incentive to “under-invest time. the principal has no way of identifying the culprit. 26 . 123 In Union Carbide v.W. courts are consequently failing to consider the existence of a “plausible link” 122 between insurance and the type of incentives that other courts have not only considered but have also found to be relevant.how insurance could likewise “eliminate incentive” to avoid negligence and similarly result in “relaxed vigilance”?118 Considering incentives in situations other than indemnity agreements can also provide harmless perspective into motives and behavior. it is unlikely that this difference is the cause of courts’ failures to look at insurance in the same way as they have indemnity agreements.2d 833 (S. Shea v. especially because they have failed to consider any incentives associated with insurance in the first place. and in the presence of multiple employees. and such evidence remains a type of “bête noire” after all.. Bajari et al.2d at 265 have considered insurance evidence to be a “bête noire” of the past. Where would be the harm.. Rev.2d at 257. if responding to incentives to relax vigilance. Contracts as Organizations. Rule 411 yet maintains its suppressive effect over evidence of insurance. 118 Northwest Airlines. energy or assets”119 into his job that existed because the employee was shielded from the employer’s direct supervision?120 So even though evidence of the same incentives that insurance creates for insureds may very well be admissible under a different guise. at 843. Id. 28 F. still face risks of harm that drivers may not face. 351 F. for example. Perhaps the old stigma attached to the word “insurance” thus still remains.Y. the court held that evidence of a company’s licensing practices was relevant to show that company’s incentive to engage in the allegedly unlawful conduct.App. it is possible that the stigma remains. 375 F. supra note 65. agents in a principal-agent relationship are also susceptible to moral hazard because the agent’s behavior is not directly observable by the principal. 119 D..N. If this has had any influence on the disparate treatment. for example. 51 Ariz. Regardless.. L. 2001). 120 According to contract theory.121 Possibly hung up on such an ancient rule. 622 N.

this discussion has demonstrated a strong case for reconsidering at least the relevance of insurance on the issue of negligence or wrongdoing.g. as this discussion will unravel in Section VI. too. And although this may be a viable reason why insurance-created incentives would be treated differently. the alleged prejudicial effect from the introduction of insurance evidence may. Evidence of insurance thus has an arguably greater probative value than what has previously been considered. Unlike evidence of a principal-agent relationship or an indemnity agreement. EVID. The Learned Hand theory of negligence confirms that an insured individual has a diminished incentive to exercise care and is therefore more likely to make choices that are considered in breach of a duty of care. this note first discusses competing inferences that may determine the likelihood that any prejudicial effect outweighs the probative value of insurance. whether the prejudicial effect of insurance—if there even is any—outweighs this increased probative value should also be reconsidered. But before this discussion turns to considerations of the alleged prejudicial effect. the introduction of evidence of insurance allegedly carries with it a possible prejudicial effect because of the simultaneous introduction of deeper pockets. and insurance’s similarity to evidence of incentives that courts have long been admitting. be a stale argument. CONSIDERING THE PROBATIVE VALUE OF THE MORAL HAZARD INFERENCE While evidence of insurance and the incentives arising from the associated moral hazard could assist a factfinder in its determination of a material fact (e. In sum. 401 27 . the long-asserted argument that evidence of insurance is irrelevant is not wellfounded simply because insurance—as a result of moral hazard—gives rise to losses which may give rise to liability. negligence).pay. however. R..124 exactly how 124 FED. As a result. V. Given the low standard of admissibility for relevant evidence.

238 (1996). 11. an uninsured individual. It should therefore follow that an individual with the least amount insurance would exercise the most amount of care. an uninsured defendant introducing an absence of evidence may be “of extreme 125 Tom Baker. 28 . at B3. would presumably take less risk as she must solely bear all costs associated with risk-taking. not subject to the same moral hazard. citing James K. Glassman. First of all. Drop Budget Fight. ST. On the Genealogy of Moral Hazard. in the same way that a plaintiff could introduce evidence of the defendant’s insurance to show an incentive for greater risk-taking. intuition may give rise to further doubt.”125 or. 75 Tex. 1996. Rev. LOUIS POST-DISPATCH. a lesser amount of insurance would equate to more caretaking in this context. and in general. In fact. Feb.probative moral hazard’s influence actually is on insured’s behavior may be questionable. the “lesson of moral hazard” itself indicates that “less is more. Accordingly. L. That comparison is between insured and uninsured individuals. In fact. greater efficiency and an increase in social wealth. consider the implications of the foregoing with respect to uninsured individuals: if an insured individual is subject to moral hazard and thus takes greater risk. Intuition might lead one to question moral hazard’s implications if making one crucial comparison. Shift to Welfare. While its similarity to issues that courts have already considered relevant should indicate at least some degree of probative value. an uninsured defendant could likewise introduce evidence of the absence of insurance to demonstrate the incentive to take greater care that she would have had whenever the lawsuit-causing incident occurred. 237.

“experience denotes that the most responsible and trustworthy drivers are insured. 129 Slough. 128 Tom Baker. While Green believed this was one major reason for which the rule against insurance should be reconsidered. whereas the irresponsible are known to peregrinate without benefit of company protection. 127 The assumptions a jury makes about the presence of insurance is discussed. 157. 33 Tex. 75 Tex.127 But assuming that the jury automatically awards more damages if no party mentions insurance is not the only problem with this reasoning. Some of this proposition may also offend the reader’s common sense: it seems counterintuitive128 that the individual who would lack the foresight to protect against risk with insurance would actually be the more careful. Rev.”129 If evidence of insurance is introduced against a presumably “responsible” insured individual. 159 (1954). this argument assumes—and it will be shown that this assumption is erroneous—that insurance has an appreciable impact on jury decisions. While the jury may assume the presence of insurance because it is so prevalent. Blindfolding the Jury. L. 238 (1996). Indeed. supra note 13 at 710.importance” 126 to them. Rev. The subsequent discussion. Green argued that an uninsured defendant’s opportunity to introduce their lack of insurance was indeed of extreme importance because the jury would otherwise assume she was insured and would be overly generous in their verdict award. the net probative value of the latter is more likely to be outweighed by the danger of unfair prejudice or waste of time. insurance-buying individual is labeled as the reckless one. however. whereas the law-abiding. The significance of this competition is that if the character inference offsets enough of the moral hazard inference. Baker’s article focuses on his disbelief of the “less is more” lesson of moral hazard and discusses not only the counterintution but also the counterfactual bases for such a claim. 29 . demonstrates that asserting that the purchase of insurance is determinative or even indicative of an insured’s character for responsibility may not have the “good reason” that some 126 Leon Green. On the Genealogy of Moral Hazard. responsible individual. it is doubtful whether that would affect their decision. L. 237. the inference drawn from the insurance-created incentives to drive recklessly would therefore compete with a possible inference of responsibility reached by virtue of the fact that the individual is insured. infra. in Section V(A). because a jury may otherwise assume the presence of insurance if it was not discussed in the trial.

And though it may be intuitive to posit that at least a motorist who ignores statutory requirements for insurance is less responsible than their insured counterpart. if considered. insured farmers respond to moral hazard and take greater risks with respect to chemical use on their crops. 935 (1999). John K. that a farmer insuring her crops would be more trustworthy and responsible than an uninsured colleague?131 While the empirically-supported moral hazard effects can explain why an insured farmer might take more risks than her uninsured colleague. of Ag. 31636 NBI-CLE 1.” and fails to consider any causal factors for such an assumption. J.133 not responsibility. Significant contextual differences in this analysis are that a farmer’s responsibility to her crops is socially much less important than a 130 See e. 133 Among several explanations for why affordability may be a better indication of the likelihood of purchasing insurance. Moral Hazard. National Business Institute. 132 Id. Econ. John Allyn blindly assumes “with good reason that the uninsured driver is not as safe a driver as his insured neighbor. 131 John Horowitz and Erik Lichtenberg provide empirical evidence that. for example. Allyn. The level of responsibility may be similarly independent of the presence of insurance when considering other markets. like the healthcare market. This is merely an assumption that he accepts without giving any mention to statistics or other empirical evidence which. 926. the nation’s current healthcare debate stands as irrefutable evidence that lower-income individuals indeed may be less likely to have insurance. where arguably the greatest determinant of the decision to insure is affordability.132 positing that the uninsured farmer is equally if not more prone to take risks because of an irresponsible nature is tenuous at best. But automobile insurance may be different. Insurance. John B.130 and may therefore not be sufficiently apparent to a factfinder such that it would create substantial competition with a moral hazard inference. Automobile Insurance Coverage Issues. would have revealed a myriad other factors that may explain the reasons for which uninsured are uninsured—not just that they are inherently irresponsible. compared to an uninsured farmer. and Chemical Use in Agriculture. 75 Am.g. Horowitz & Erik Lichtenberg.writers so hastily assume. 30 . Irresponsibility is a Market-Specific Criticism The foregoing discussion of moral hazard has demonstrated how insureds in many markets and circumstances may be subject to a moral hazard effect. Is it equally intuitive. 34 (2006). this position may not hold with the same universality as that of moral hazard’s effects. A..

. and a farmer may not necessarily be in violation of law if she decides not to purchase insurance.g. Situations such as a farmer choosing to purchase crop insurance because her farm is in tornado alley. Risk & Ins. any inference regarding character should arise only in circumstances in which insurance is not only to protect one’s own self against the risk of loss. Therefore. and thus. it may follow that this individual. The same could not be said of other insurance markets. Instead. while the other seven states have some sort of financial responsibility laws. would not justifiably give rise to 134 As of 2000.135 or a sense of the duty to obey laws136). the presence or absence of insurance may only be telling of one’s character for care (and thus. 67 J. would exercise care in order to violate social norms or to avoid invading others’ rights. if a certain type of insurance does not carry with it implications of such import as statutory obedience and social responsibility. While this is an untested assertion. thereby manifesting some degree of responsiveness to law. but is also to protect others or serve some other social cause as yielding to law—as in automobile insurance—for it is these factors that may have some implications on an insured’s character. 136 If an individual is responsive to mandatory insurance-purchasing regulations. because of this sense of social responsibility. 135 If an individual has a sense of social responsibility. 282 (2000). Schmit.motorist’s responsibility to other motorists. 281. the question of competing inferences cannot be legitimately raised. a sense of social responsibility. 43 states and the District of Columbia follow some version of compulsory insurance. In other words. it would follow that they might have a similar degree of responsiveness to regulations when driving as well. or a low-income individual forgoing insurance because it is not affordable do not indicate anything about these individuals carefulness. where the competing character inference is justified) in situations where the choice to purchase insurance would also be influenced by some other factor that may also influence the care that one takes (e. Factors Affecting the Relative Incidence of Uninsured Motorist Claims. Yu-Luen Ma & Joan T. 31 .134 but also because a driver owes it to other drivers to provide compensation for a wrong they could possibly commit while driving. So not only could driving without insurance still be considered irresponsible because it is in violation of most state regulations. as would an uninsured motorist. it is according to the author’s common sense that this seems to follow.

they would not completely forego 137 “Automobile insurance represents nearly 50 percent of property/liability insurance premium volume in the United States and similarly large percentages throughout the globe. the riskiest (and perhaps least responsible) drivers would purchase a policy that offers the most coverage. but other empirical evidence confirms the existence of another pertinent effect called adverse selection. B. while the safest drivers purchase inexpensive policies that offer little coverage. Cohen finds evidence of adverse selection in the automobile insurance market. Although hypothetically possible. From this follows the possibility that an uninsured individual has actually made the decision to go forego insurance because they perceive that it would be more costly to pay for insurance that would cover the cost of a rare accident (because they are careful) than to individually bear the full costs of that accident. the cited adverse selection studies consider only insured parties. In fact.” Id. The most prominent137 type of insurance market where there are these implications is the automobile insurance market. though. supra note 71 at 197. there is much empirical evidence that opposes this position.a competing character inference. 138 Cohen. Even here. This is so because there still may be an intuitive. lacks empirical evidence to support it. the inference about character may not be clearly drawn. The Mystery of Uninsured Motorists Though an inference about responsibility seems to intuitively flow from the question of a motorist’s insurance status. competing inference about character—that even if a driver perceives that they are a careful driver (never mind the truism that most people think they are above-average drivers). and the context changes significantly when considering insured parties against uninsured parties.138 This adverse selection phenomenon posits that individuals will choose insurance coverage according to their own perceived risk-taking tendencies they have while driving—in other words. 32 . where low-deductible choices are correlated with more accidents and higher losses. Not only does empirical evidence of moral hazard suggest that an insured motorist would take more risks.

though. Yu-Luen Ma and Joan Schmit performed an analysis. Ma and Schmit’s study corroborated previous studies141 when finding empirical evidence that demonstrated that the number of uninsured motorists increased with the 139 140 See Ma & Schmit.140 suggesting perhaps that those who would be uninsured have at least some sense of responsibility when it comes to obeying the law. they have found other significant variables that correlate with the rise of uninsured motorists.139 And when writers have observed this group. and possibly socially irresponsible. uninsured motorists in any context have received little attention in the literature. Id. To begin with. This evidence. Ma & Schmit. they may also have some degree of responsiveness with respect to road and traffic regulations. But even those who would suggest that uninsured motorists are less responsible behind the wheel would struggle to find empirical evidence that can support their position. The question still turns on implications of individuals who purchase no insurance altogether. 33 . supra note 133 at 282-83 for a review of the literature relating to uninsured motorists. These most careful and responsible drivers may instead still adversely select some coverage. that yielded results indicating that the prevalence of uninsured motorists increased as a state’s insurance regulatory scheme became less strict. at least pushes against any suggestion that social responsibility correlates with the amount of insurance one purchases—that one who buys more insurance is more responsible and trustworthy than one who buys less. making it more difficult draw an inference of a risk-taking character. perhaps a more compelling reason than a lack of social responsibility is the individual’s subjection to poverty. supra note 133 at 288-93. 141 Ma and Schmit review previous studies that consider the effect of insurance prices on the decision to purchase insurance. for example. but with the least amount possible. With regard to reasons for which an individual might choose not to buy car insurance. at 283. This also indicates that if otherwise uninsured motorists respond to stricter regulations for acquiring insurance.insurance because it would be against the law.

“given choices and a limited amount of money.. at least fail to provide any reasonable basis on which proponents would found an argument that uninsured motorists are inherently less responsible. that quantifying carefulness when driving is difficult in terms of the type of inference that might be associated with insurance. for example. Levy and DeLeire use data from the Consumer Expenditure Survey to find that prices. available at http://www.insurancejournal. Uninsured Drivers Travel Under the Radar.percent of people in the area living below the poverty level. this does not mean that an inference about character for care is ruled out. 34 . Such an inference from the existing evidence would not only be tenuous. Jones. 2003. What Do People Buy When They Don’t Buy Health Insurance and What Does that Say about Why They Are Uninsured?. feed their kids second” while insurance descends to a “distant choice. There could also be an endogeneity issue with some variable such as poverty.g. 45 Inquiry 365 (2008). This statement is made by Texas Insurance Commissioner Jose Montemayor.142 Other insurance professionals agree that it is simply a “reality” that. most people will choose to pay their rent first. though.”143 Results from other markets confirm the same preference of impoverished individuals. 144 See e. C. and is cited in: Stephanie K. but must imply that an individual who chooses to pay rent and feed her family before paying the insurance bills has an innate propensity to drive more recklessly. preferences and income help explain why some households do not buy health insurance. at 288-93 (2000). The foregoing has demonstrated that the 142 143 Id. Such is simply not rational. In this study. Need for Further Investigation The point of this diversion has been to consider the possibility that any probative value from inferences about character from the presence or absence of insurance would reverse the probative value of moral hazard’s effects such that prejudice or waste of time considerations would outweigh any remaining probative value. This possibility is mentioned briefly. Helen Levy & Thomas DeLeire.com/magazines/west/2003/08/18/coverstory/31590.144 But even if the affordability of insurance thus appears to be a significant factor that could contribute to the decision to buy insurance. infra note 145. 145 The lack of empirical evidence could be for a number of reasons. It could be. the lack of empirical evidence confirming a lack of social responsibility in uninsured motorists does not rule out the possibility that such a correlation exists. August 18.htm. Indeed.145 The existing empirical studies. INSURANCE JOURNAL.

e. and squanders any wealth they do possess). if not determined by a party’s demeanor and appearance. there is a possibility that such a characteristic is independently significant or otherwise endogenous146 with respect to factors already considered. Would a jury be more likely to infer something about A’s character for driving care if A appeared in court as a clean-cut.e. determining. the factfinder would also be less likely to independently draw such an inference. so any inference about this party and their character for driving may rely in large part on what the jury sees of this person in court.character inference is limited in scope. who chooses not to purchase insurance because A works hard at running a business from or near home. If the inference is so tenuous. because of a lack of responsibility. or if A dragged herself into the courtroom unkempt and apathetic about the entire proceedings? Perhaps the jury may be prone to make an inference about character from the absence of insurance in either context. Even if the factfinder could infer an individual’s character for care from their insurance status. the inference would likely at least be influenced. that an individual is poor because of a general irresponsible nature (i. but a negative impression from demeanor or appearance could certainly make such an inference much easier. The factfinder will not see this party behind the wheel. for example.147 and how would the court separate the inferences based on their sources? In conclusion. whether one is irresponsible because they are poor. an inability to obtain a job may be because of a lack of commitment to work instead of a lack of commitment to others).. that individual is unable to secure a job. for example. In order to determine the independent significance of an irresponsible nature. Consider uninsured motorist A. There is thus a need for further empirical exploration before the character inference drawn from insured status could be conclusively ruled out as having explanatory power that would compete with moral hazard effects. or poor because they are irresponsible. although this irresponsibility may not necessarily be of the same kind that would cause her to be irresponsible in consideration of others (i. and is therefore an infrequent driver. while evidence of insurance offered on the issue of liability may have a limited probative value. moreover. Though studies have not explicitly considered an inherent tendency for irresponsibility as a causal factor for remaining uninsured. this character inference seems too tenuous and unproven to say that it could overtake a significant amount of probative value from the moral hazard inference. but does not make much money. wellspoken individual who offered believable testimony. and may only be one among many other empirically tested factors that explain an uninsured’s behavior. how much of that inference could possibly be drawn from the party’s demeanor and appearance. 35 . a character inference opposing a moral hazard inference may have only 146 It is possible. 147 If a jury were to infer anything about the character of a party based on insurance status. Until then. This can be seen by observing an uninsured driver in two different contexts. it must be separated from the variable in which it is endogenous.

. should not impede the use of evidence of insurance to demonstrate moral hazard effects. 36 . 783 (D.C. the next section will turn to whether or not any prejudicial effect would outweigh such in violation of Rule 403..2d 1331. VI. This undue bias against insurance evidence has not gone unnoticed. although before the codification of Rule 411. 782. 151 40 A.L. 1348-49 (9th Cir. 149 FED. scholars were already questioning the 148 By the choice of certain terms in the rule. the legislature adopted a basic policy favoring admissibility of relevant evidence. 403 (emphasis added). Hearst.S. Southern Bakeries Co. for example. v. 152 Some courts. 1965) (emphasis added). however.R.Supp. has essentially reversed the protection of Rule 403.”151 Courts have also demonstrated their unwillingness to employ typical Rule 403 standards when considering evidence of insurance that may not fall under an express exception. where they would require only a “reasonable showing of prejudice”152 before evidence of insurance will be excluded. EVID. R. Having established the probative value. 541 at § 2[a] (emphasis added). 563 F. RECONSIDERING THE PREJUDICIAL EFFECT OF EVIDENCE OF INSURANCE The Federal Rules clearly lay out an admission-friendly148 standard for considering the prejudicial effect of evidence. 1977). See e. Before much of a case was made in favor of the relevance of insurance. requiring that the danger of “unfair prejudice” “substantially outweigh”149 the probative value of proposed evidence before the court can even consider150 excluding on the grounds of prejudice. thus giving courts discretion in determining whether evidence should be excluded on these grounds.S. had held that after only a “reasonable showing of prejudice” could a court declare a mistrial because of the introduction of evidence of insurance. See e. U. making admission of anything touching upon insurance increasingly difficult. and without more empirical evidence. the policy favoring admission of relevant evidence is further indicated. represent how evidence of insurance can be used only when “highly probative of a material issue.marginal effects on the probative value. 150 By stating that prejudicial evidence only “may” be excluded. Fed.g. The application of Rule 411. The explicit exceptions listed in Rule 411.. Vaughan v.g. 247 F.

supra note 38 at 744. 1316 (Ariz. A. Duncan. 516. 465 (Tex. This discussion will now further explore this argument. Imagined and Exaggerated Prejudice As early as the middle of the twentieth century.alleged prejudicial effect of insurance evidence. 159 Edith Greene et al. While early studies seemed to suggest that mentioning or instructing the jury regarding insurance resulted in skewed verdict amounts.160 Varying the severity of 153 154 See Relevancy and its Limits.g. at 201. 169 S. the argument against the likelihood of prejudice is even stronger.2d 462. 194 (2008). many scholars began to be unconvinced that evidence of insurance would even sway in the slightest a jury’s decision. 1943). 45 La. 510.2d 1312. empirical evidence has demonstrated that the mentioning of insurance would not have any significant effect on the jury’s verdict. turning first to the position that the introduction of insurance does not yield any prejudice in the first place. L.g. supra note 77 at 193.. 1983). 155 Barrington v. Indeed. and for a larger amount. that if moral hazard is able to establish some positive probative value. 160 Id. Shouldn’t We Consider…? 14 Psychol.”158 Less scoured studies have revealed results which tend to show that insurance and the frequency with which it is discussed is “unrelated”159 to damage awards.154 Disbelieving that “a jury is more apt to render a judgment against a defendant.. 597. 601. 37 . 158 Susan A. 157 Broeder. One recent study analyzed jury deliberations following the simulation of an automobile negligence trial that was based upon the facts of an actual case. just as the “passage of time” has “eroded much of the danger of prejudice.153 It would seem.. 156 Courts have questioned whether the rule itself was not “rather archaic” because of a lack of prejudice. 136 Ariz. Admissibility of Insurance Policy Limits. 1230 (1985). if it knows that the defendant is protected by insurance. Hefter. Row. 667 P.”155 some have tested the archaic156 allegation to determine whether there is any prejudice against the defendant. Id. 1299. 140 Tex..W. and then turns to consideration given an assumption of at least some prejudicial effect. 194. Rev. See e. Carman v. See e. Pol’y & L. then. Pub.157 the passage of time has eroded the significance of such early studies.

App. 601. 1316 (Ariz. the court reasons that because of recent mandates regarding the requirement of mandatory insurance. The Comparative Costs of Allowing Consumer Choice for Auto Insurance in All Fifty States. Id. L. 164 In Mitchell v. Mitchell v. coverage was sufficiently prevalent such that courts recognized that jurors were sophisticated enough to presume the defendant had insurance. 165 O’Connell et al. settlement discussions and attorney’s fees) together accounted for only 3% of the variance in award size. at 210. it would be in defiance of common sense and an insult to a jury to argue that these reasonable members of society were not astute enough to be already aware of the presence of insurance.injuries and reprehensibility of the defendant’s conduct. 819 So. especially164 because. head-turning reaction that it may have before the prevalence of insurance. 38 .166 And jurors may just as easily recognize that automobile 161 162 Id. 163 Id. 160. Hefter.165 But even before states began passing legislation requiring liability insurance. 1983). Appendix C (1996). or the case would not even be in court.161 Using regression analysis. jurors are already aware that insurance companies are involved in the litigation. at least with regard to automobile insurance. the results revealed a statistically insignificant relationship between the frequency with which insurance was discussed and the defendant’s insurance status with the award amount. Rev. all 50 states have set certain minimum requirements for liability coverage.163 A possible explanation for the disparity between studies is the fact that.2d 548 (Miss.. 136 Ariz. unlike in the 1950’s when the earlier study was performed. Presently.. introducing evidence of insurance would not illicit the same surprised. 597.2d 1312. for example. the study also discovered that forbidden topics (including insurance. meaning that these topics did not significantly affect the amount of damages.162 Moreover. at 211. the study aimed to determine to what extent jurors would discuss evidence not introduced at trial (such as insurance) as well as the extent to which that affected damages amounts. 667 P. Glimm. 55 Md. 166 Carman v. Glimm. 2002).

citing K. 87. one only sees the curability of any prejudice that may result from insurance evidence. Therefore. 267 Conn. say. 168 Greene et al. Biased Interpretation of Evidence by Mock Jurors.” 170 The Rules of Evidence allow evidence of insurance to be introduced for other purposes such as bias or agency. where the court posits that jurors probably assume that doctors carry medical malpractice insurance. Russo. equipped with common sense and awareness that they bring into the courtroom. as in medical malpractice cases. Conn. 2003). Applied 91. there is strong reason to believe that introducing evidence of insurance will not weigh the defendant down with unfair prejudice. B. “Only undue cynicism will support the thesis that knowledge of the presence of an insurer’s interest will necessarily distort a juror’s judgment.Supp.167 If jurors. 59. It is Curable Assuming that there was some prejudice against the insured party if her opponent introduced evidence of insurance against her. Carlson & J. 90 (D. 836 A. by virtue of the moral hazard inference.insurance is not the only market where insurance is likely to be present. the mere mentioning of it would do little marginal harm to the defendant. See Vasquez v. 122 F. 411. as this discussion next endures. But even if entertaining a cynic’s view. 39 . supra note 158 at 198. Rocco. the issue of agency—why cannot the same remedial measures that courts take in other instances work for instances in which insurance is offered to prove negligence? 167 But jurors may make assumptions about the presence of insurance in other situations. or on some other statutorily permissible purpose.2d 1158 (Conn. 91-103 (2001).. unless viewing the situation in an unduly cynical169 lens. Experimental Psychol. Johnson.170 But considering some assumed prejudicial effect in this circumstance begs the question: how does the mention of the presence of insurance create any more prejudice when offered on the issue of negligence than it does when offered on any permissible grounds? Because insurance evidence. EVID. 169 Schevling v. R..E. FED. the same prejudice—that a jury would hear about insurance and thus adjust its verdict accordingly—should apply whether the opponent offered insurance on the issue of liability. has probative value on the issue of negligence—just as it would on. 1953) reasoned. Even if There Was Prejudice.A. 7 J.168 can deduce the presence of insurance.

2d at 270. 867 (2nd Cir. Some studies172 and even courts. 405 F. but to consider only the relevant part of insurance evidence. by the end of the case.As courts backed away from their fright of the word “insurance” and began to realize the relevance of insurance for purposes outside of the issue of negligence. supra note 38 at 744. if not instructed on the issue.2d 866. might even take the issue with them into 171 172 Corbett. But because insurance is now more prevalent than it has been in the past. in Cuccarese v.173 however. The question here remains how a limiting instruction could not also cure any prejudice stemming from a mention of insurance that implied a defendant may have been more likely to take risks? A limiting instruction could therefore be an effective tool to remind the jury—again. Broeder. the jurors would have forgotten a reference to something they more than likely would have already assumed. it is more likely than ever that juries. or. Nevertheless. if there is any need to do so—to disregard insurance with respect to awarding damages. 1969) held that a judge’s instruction that “the jury should not consider defendant’s ability to pay a judgment in reaching its verdict may have made the situation worse by reminding the jury of the prior references to insurance.” 40 . 173 A Second Circuit court. Soloman.. control or agency without any of the prejudicial affect. courts devised a simple remedy to the protect parties from prejudice after parties introduced evidence of such evidence: courts could correct a mention of insurance by issuing jurors a limiting instruction on proper considerations of the evidence of insurance. jurors would get the most relevant facts about bias. 375 F. whether insurance caused an individual to be more or less negligent. for example.171 Fixing such a potentially detrimental concern as prejudice with a solution that seems as simple as paternalistic hand-slapping suggests that prejudice may not be too terribly problematic anyway. courts saw limiting instructions as a fitting means by which they could ensure that from evidence of insurance. whether any existed or not. have suggested that instructing the jury on insurance would only remind the jurors of insurance—as if.

though. There still may be lawsuits where. It is not likely. Greene et al. L. for example. Van Schaik. 179 Edith Greene’s study observed jurors’ reaction in the recreation of only an automobile negligence trial. 157 (1954). 782 (3rd Cir. rather than restrain. Even though jurors may still make assumptions about insurance in cases involving 41 . “Blindfolding the Jury. 157 (1954). 178 In Cuccarese v. 782 (3rd Cir.” 33 Tex.2d 775. then.178 And even though empirical evidence demonstrates how mentioning insurance will not affect verdicts or the amounts of such. To give some credit to the historical argument. Kiernan v.” 33 Tex. Therefore. jurors would not make the same assumptions about the involvement of an insurer.g. Leon Green. 347 F. and could even produce the specific guidance jurors need to handle evidence of insurance that they may otherwise misuse. 867 (2d Cir. Soloman.177 Instruction may thus be a proper way of avoiding potential prejudice or a wayward jury. Rev. but would not likely “suppose that an eleven-year-old boy at a summer camp was covered by liability insurance for injuries caused to one of the camp’s counselors.. 405 F.”176 Scholars and courts alike have thus suggested that the more appropriate solution would be to dissolve the phantom in the courtroom by open talk of the previously taboo topic.2d 775. 1965).174 mistaking it for a relevant consideration. supra note 158 at 194.. 1969).the jury deliberation room. 1965). “Blindfolding the Jury. Van Schaik. neglecting to instruct a jury with regards to proper use of insurance because of the fear that such will open to the jury a previously unknown realm175 “may invite.” The court consequently found that the introduction of such evidence may well have been the source of substantial prejudice.179 Whether a 174 Discussion in the jury room of the fact of insurance is a hazard in every case where there is a sharp division of jury opinion. L. that nearly a century of legal precedent was based on a wholly erroneous presumption of prejudice.2d 866. the court acknowledged that jurors may well be familiar with the prevalence of automobile insurance. speculation and paradoxically lead to the inconsistent and unpredictable verdicts and uncontrolled decision making that it was intended to curtail. 347 F. 176 Greene et al.. Rev. because insurance is not as prevalent in the relevant market. 177 See e. this discussion concedes that the prejudice eroded only because of juror’s recognition that most drivers have insurance. Leon Green... 175 Kiernan v. it is unclear how much of this conclusion is explained by the fact that jurors presume the existence of insurance in the automobile market. supra note 158 at 195.

surpa note 45 at 257. or that introduction of the evidence of insurance would result in incurable prejudice. Evidence of insurance has simply outgrown the prejudicial position it once had that warranted a special rule of its own. that moral hazard is a relevant consideration. 42 . jurors may not make the same assumptions in trials dealing with less common markets of insurance such as kidnap or pet insurance. courts have the ability to cure any prejudice arising from the mention of insurance for relevance purposes with a limiting instruction.180 or that special circumstances surround the trial such that there is a danger of unfair prejudice that might substantially outweigh the relevance. or to exclude the evidence of the basis of Rule 403. age. Among the relevant factors was the price elasticity of an individual’s demand for healthcare (meaning how responsive the quantity of healthcare the individual demands is to price changes). In the end. 180 Hyman Joseph explores. It is contended. in the market of health insurance. however. however. After all. this does not. and while the probative value may admittedly be somewhat low. There is a possibility that some individuals are immune to moral hazard. courts would still retain the ability to instruct the jury accordingly. it outweighs an even lower possibility of prejudice. In those cases. Rule 403 instead has installed sufficient safeguard against any danger of prejudice that insurance may pose. supposing that Rule 411 was modified or substantially limited in accordance with this discussion’s assertions. Though there may be some differences when considering different types of insurance. type of illness and others. life or home insurance. the variables that affect the extent of moral hazard. any introduction of evidence of insurance—whether on the issue of negligence. health. equally common insurance markets like medical malpractice. bias or agency—would still be subject to Rule 403. imply that insurance would not be relevant. Moral hazard may not be able to explain the cause of all negligence acts that ever occur or that culminate in a lawsuit. Joseph.study of admission of insurance in cases dealing with types other than automobile insurance would reveal the same results is unclear.

While moral hazard has yet to surface in the literature as a possible justification for allowing evidence of insurance on the issue of negligence. Successfully introducing sufficient evidence to imply what may seem to be a counterintuitive inference of negligence from insurance might require extraneous evidence or extensive expert testimony that could send the court on a detour. Despite practical difficulties. wasting both time and money of litigants. insured individuals face a diminished incentive to exercise care—the response to which. may be subtle and subconscious. evidence of insurance could justify an inference of negligence because an insured individual is more likely to be negligent or take extra risk when insured than they would otherwise be. This discussion has also explained how. CONCLUSION This discussion has explored the implications of considering moral hazard in the framework of the underlying policies of Rule 411. Allowing the admission of insurance evidence. it may admittedly have limited practicality in a courtroom. is that the introduction of this evidence would be conducted under the scrutiny of Rule 403—the extensiveness of the evidence of insurance thus remains up to the discretion of the court. Most important. for example. unlike that which scholars had previously considered. Though it is the contention of this note that evidence of insurance on the issue of negligence or wrongdoing should be admissible. because of this incentive and the responses thereto. if not barred by an undue prejudice. though. moral hazard nevertheless implies the relevance of evidence of insurance and that the blanket exclusion under Rule 411 deserves another look. 43 . this discussion has demonstrated that it certainly warrants either judicial or legislative consideration. could be blocked by the “waste of time” or “confusion of the issues” standards under the same rule.VII. Because of moral hazard.

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