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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as proponents maintain that the rule still serves some benevolent purpose. 495 F.. have to some degree echoed the critics. 40 (N.. 155 F.M..2d 1207 (6th Cir. Eventually. have refused to exclude evidence of 9 See e. 1965) (allowing plaintiff’s counsel to illicit testimony regarding the bias of the witness).. Heuss v. v. Slough. and therefore applies Rule 403 to determine whether evidence of insurance was proper before the jury). See e. 14 Id. Inc. 15 Mac Tyres. v. 589 P. courts began to grind down the rule’s exclusionary teeth as certain exceptions to the blanket exclusionary rule developed. 1039 (N.or that she otherwise did some wrong. 30 F. Coble v. as a ground for a new trial.11 The exclusions may have chipped away at the overarching exclusionary rule of old. 1967). Inc. 12 Calnan. 12 The insistence with which courts have applied this rule. These courts. Kan.”14 A minority of courts. Relevancy Unraveled. but yet unmarred is courts’ rejection of evidence of liability insurance offered on the issue of fault. the more general exceptions codified in Rule 411 slowly developed.g. availing themselves a “great deal of discretion”15 with respect to the exclusionary rule. 448. 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). Tex. 270 (3d Cir. 82 F. at 1178.M.g.2d 342 (6th Cir. 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.Supp. has not been without condemnation. 92 N. 1936) (holding that evidence that a company carried liability insurance was admissible to demonstrate agency). at 713.. v. 446. Rockwell Standard Corp. 675. the precedent began with even stricter restraints. Wayne Broyles Engineering Corp.2d 1037.C.2d 478 (5th Cir. 11 Courts began to back off the strict prohibition of the word “insurance” as they realized the word would sometimes voluntarily. supra note 8.2d 202 (5th Cir. however. See e. Trehern. 711 (1957).”10 Eventually.2d 265. Borandi. 1974). 1979) (where the court recognizes that the question of insurance can also be “proper and dignified” before a jury.g. Vigil. unexpectedly or incidentally be introduced. 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. Ingalls Shipbuilding Corp. later. Complete Auto Transit. Phillips Petroleum Co. 351 F. Rev.D. And while the rule as presently codified calls for strict exclusion of evidence of insurance on negligence issues. McCoy v. moreover. 39. 13 M. L. 5 U. 375 F. 5 . 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. Universal Carloading & Distributing Co.

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. 92 N.S.insurance because of reasons ranging from belief that the rule rests on “fictitious”16 beliefs about the effects of such evidence.M.”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. 856 (1977).2d 798 (2d Cir. however.” Id. at 800. cert. WALTZ. 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 . 143 P.2d at 268. 20 Ingalls Shipbuilding. Chleborad. denied. 19 Corbett. 691. 402. 93 N. 411 advisory committee notes. 22 Charter v. supra note 13. R. Evid. 551 F. EVID. as “evidence which is not relevant is not admissible. at 711.M. 1943). R. 26 Id. §5362 (1 st ed. 1977). “There can be no rational excuse [for admitting evidence of insurance on the issue of negligence].” FED. 589 P. an inference of non-fault from the lack of coverage—is “tenuous”21 at best with only “questionable probative value. 1979) citing Olguin v.) citing JON R.M. EVID. similarly. The claim continues: an inference of fault drawn from the presence of insurance coverage—and. 18 These opponents would contend that it has no business in the courtroom because of its irrelevance.M. Kohlhaas Tank and Equipment Co.. 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. App. 21 FED. (1975) 25 In Brown v. 685.2d at 1039.2d 585 (N. Walter. 155 F. much more than outweighed by the probability that the real issues will be obscured. 829 (N. 434 U.2d 246. 62 F. 377. THE NEW FEDERAL RULES OF EVIDENCE 38 2d ed. 24 23 Fed. 17 Mac Tyres. & Proc. 23 Slough. critics may be overlooking the possibility of a more subtle influence on insured individuals.2d at 204. at 448. 47 N. 604 P. 1933). That is at most the merest guess. Thygesen.17 Courts and legislature rely.M. on two fundamental reasons for the persistent exclusion of evidence of insurance. except the flimsy one that a man is more likely to be careless if insured. Prac. Judge Learned Hand claims. 248 (8th Cir. 375 F.2d 823.

C. 6 Dist.2d at 800. Dec. L. 62 F. 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. 33 Maxwell V. however. making it even harder for jurors to base their decision “on the real issues. WD-81-16. Securities Arbitration and Insurance: When Worlds Collide. 781 (3rd Cir.”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.A. 1981). Bull. 347 F. 18. 15 Neb.. Beghtol.”27 Because of the “prejudicial and inflammatory effect”28 allegedly inherent in evidence of insurance. The Present Rule as to Disclosure of Insurance in Personal Injury Cases. 18. at *3 (Ohio App. 329 (1936-7).A.”29 Much of this criticism.g. 1981 WL 5867. 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. 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. 6 Dist. Van Schaik. Aug.”34 This fear extends to both generous juries that would award “extravagant verdicts”35 because a defendant has insurance. 782 (3rd Cir. 1965). 31 Id. 1981 WL 5867. 1965) Ogle v. 1686 PLI/Corp. at *3 (Ohio App. L. 1981). 7 . 29 Ogle v. 15 Neb. and also to stingy juries that might go easy on an 27 28 Kieman v. at 454 32 Brown. The Present Rule as to Disclosure of Insurance in Personal Injury Cases. NO. Bull. 14310). Clint A. 30 See e. NO. 34 Maxwell V. Inc.. (Practicing Law Inst. Beghtol. 347 F. 2008) (PLI Order No.2d 775. Bassett Furniture Industries. Inc. WD-81-16. 6. Bassett Furniture Industries. 328. 439.would overthrow the requirement of fault as the foundation for negligence liability.2d 775. 329 (1936-7). 35 Kiernan v. Corrie. Van Schaik. C. Dec. 328.

38 Neb.38 for example.40 The results indicated that if a jury heard that a defendant had no insurance. Rev. v. 399 Pa. ceteris peribis. Broeder described this study in The University of Chicago Jury Project. L. Bybel. the jury awarded the lowest amount of damages on average. 164. and.39 Of the study’s variables. L. 41 Id. the highest amount of damages. 744 (1959). its supporters validated their argument with empirical studies. 149. Rev.”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. on average.to mid-twentieth century and uncovered empirical evidence supporting the hypothesis of prejudice.Super. 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. 1990). In a study performed at the University of Chicago. As later studies as those cited in Section VI of this note would reveal.Super. 42 Id. 744 (1959). while the jurors that heard testimony of insurance and the subsequent “fuss” regarding such testimony awarded. as perhaps widespread knowledge of the presence of insurance increased with time. researchers recorded a mock trial based on an actual personal injury trial and played the recordings to experimental juries. 581 A. that the defendant did have insurance. however. 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.2d 1380.36 And so with the present judicial system at stake. At least earlier37 in the development of the rule. 8 . Rule 411 continues to exclude evidence of insurance. 37 Studies like the University of Chicago study were conducted in the early.41 The researchers thus concluded that “juries tend to award less when they know that an individual defendant is not insured. See e. or that the defendant had insurance. after which the jury heard defense counsel’s objection and the court’s instruction to disregard the insurance evidence.insurance-less defendant. 38 Dale W. The University of Chicago Jury Project. 38 Neb.. … 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. 1388 (Pa. Com.g. 40 Id. Broeder. 39 Dale W. the earlier studies’ findings would not stand the test of time.

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

535 (1968). The Economics of Moral Hazard: Comment. 58 Am. 535 (1968). The hypothetical driver in the introduction section that avoided uncovered water damage to smash instead through a house might be an illustration. HEALTH INSURANCE 463.”48 In the example above.”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. Rev. 531. 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. 76 Cornell L. In contrast. the insured is spending money that would not otherwise be spent. Cost constraints can keep people honest—by having full responsibility and accountability in bearing 48 Mark V. Rev. there are those obvious. 531. 1963 (emphasis added).”49 True. citing O. FN45 (1990). 10 . Econ. The incentive to change behavior stems from the removal of cost constraints. supra note 49 at 535. 138. rev. that insureds sometimes engage in because they are insured. other scholars have also identified moral hazard as “the intangible loss-producing propensities of the individual assured.words. Pauly. but rather is a response to incentives that merely represents “rational economic behavior. The Economics of Moral Hazard: Comment. Hanson & Kyle D. ed. 51 Pauly.D. The First-Party Insurance Externality: An Economic Justification for Enterprise Liability. by shifting behavior to more costly choices.50 But what critics and insurers seem to misunderstand alike is that moral hazard is not necessarily a conscious choice to abandon all care. 58 Am. 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. Rev. 50 “Moral hazard also includes more deliberate acts. a company paying for its employee’s business-related expenses is not a typical “insured service. Pauly. 49 Mark V.” Jon D. Logue. Consequently. but still rare cases in which conscious choice is the sole cause of loss. 129. DICKERSON.” but it is not too hard to imagine a similar situation where insurance results in similar shifts of behavior. such as arson or suicide. Econ.

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

g. 59 BERNARD SALANIE. available at http://www. 56 See e. at 2 FN1.pdf. Coble et al. J. 61 Id. (FEDS Working Paper No. 335 (2006). Joseph.edu/Plunk/dhpaper. An Expected-Indemnity Approach to the Measurement of Moral Hazard in Crop Insurance. 57 See e. 12 .sewanee.. Econ. economists have sought to confirm the presence and scope of moral hazard with empirical analyses. Empirical Evidence of Moral Hazard Identifying hypothetical circumstances in which moral hazard operates is one thing. 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. (July 2004). 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.g. 107-109 (MIT Press 1997). 216 (1997).59 One such principal-agent relationship60 susceptible to moral hazard is found in the world of sports. Economists hypothesize that agents shielded from the supervisory glance of a principal may be subject to moral hazard..62 B. 79 Am. confirmed that American League pitchers actually do respond to Saito. Wendy Marianna Edelberg. Agric. at 1. 2004-09). available at http://ddrinen.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. 60 John Charles Bradbury & Douglas Drinen. 62 Campbell. Empirical evidence. Testing for Adverse Selection and Moral Hazard in Consumer Loan Markets. 58 See e. actually finding empirical proof is a wholly separate yet crucially important consideration.federalreserve.even crop insurance58 markets. Identifying Moral Hazard: A Natural Experiment in Major League Baseball. Testing for Asymmetric Information in the Automobile Insurance Market Under Rate Regulation. economists find individuals reacting to these shifting costs in many other circumstances where individuals are otherwise shielded from the costs of their actions. Risk & Ins. supra note 45.. supra note 2 at 101. Inspired by the importance to insurance companies and policy-makers alike. where one economist hypothesized that even major league baseball pitchers submit to a moral hazard influence.g..pdf.gov/pubs/feds/2004/200409/200409pap. or the decision to burn leaves in a driveway adjacent to the house. 73 J. THE ECONOMICS OF CONTRACTS: A PRIMER. Keith H. for example.

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

Evid. in other words. Rev.”76 The fact is that few. 14 .drivers who had filed a claim were less likely to file another claim than were those of Type C. Prac. 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. 1976. 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. Maine Evidence. if any. & Proc. 167. one may ask why scholars considering insurance as evidence have so hastily dismissed the theory as being “absurd.77 But if moral hazard theory asserts a position directly at odds with the underlying rationales of Rule 411. 16 Wayne L. 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.) citing Field & Murray. They concluded that increasing deductibles reduced the moral hazard effect. Id.75 C. why would critics of the rule not add this theory as yet another reason for which Rule 411 did not make sense? Indeed. p. consideration of moral hazard seems to be completely void from the insurance evidence literature. 75 Id. 77 For a summary of main arguments lodged against Rule 411.86. and thus reinvented incentives for these drivers to drive more carefully to avoid the costs of accidents. 193 (1969). and thus “[provided] a stronger incentive for drivers to drive more carefully.” 74 For Type A drivers. writers have taken a serious look at this phenomenon when considering insurance evidence. the authors inferred the presence of an underlying cause rooted in changes of driving behavior. 73 From the changed claim-making behavior. Perhaps one reason that can explain this 73 74 Id. §5362 (1 st ed. 76 23 Fed. Instead. see Relevancy and its Limits in the Proposed Federal Rules of Evidence.

941 (1963). among other influential economists. it would have received more attention as the legal rules developed. 108 J. UNCERTAINTY AND PROFIT. But even after moral hazard was theoretically explored. 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. Econ. Arrow. al. courts have documented their disdain for insurance evidence since the early 1900’s.79 Now. it was not until the 1960’s when Nobel-prize winning Kenneth Arrow. Econ. The Economics of Moral Hazard: Further Comment. 79 Pierre-Andre Chiappori and Bernard Salanie provide several explanations for the empirical lag behind theory development. See Pierre-Andre Chiappori & Bernard Salanie. the lack of adequate data sets. 56. See e. 56-57 (2000). 249. validation from empirical studies still lagged behind. By the time moral hazard was making its way into prominence in economics literature. Kenneth J. while headlining economists did not start developing moral hazard until the 1960’s.g. Testing for Asymmetric Information in Insurance Markets. Indeed. began to explore modern applications and implications of moral hazard. being at least introduced as early as 1921. 251 (1921). However. Uncertainty and the Welfare Economics of Medical Care. 58 Am. briefly discuss the studies that have looked for asymmetric information and the varied results of those studies. for example. Kenneth J. including.. 537 (1968). 15 . still lagging behind is unanimity regarding the extent of moral hazard effects.dearth stems from the timing of moral hazard’s development. 53 Am. Rev.. 58 Am. The Economics of Moral Hazard: Comment. KNIGHT. Arrow. While the development and exploration of moral hazard can enlighten the view of the relevance of insurance evidence on the one hand. 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. Econ. 80 Jennifer Wang et al. Rev. Mark V. RISK.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. Rev.. supra note 55.78 Perhaps if moral hazard had experienced the development it currently has. 531 (1968). Regardless of the reason for which moral hazard has yet to claim stake in the discussion on the admissibility of insurance. there was already well-settled legal precedent that disfavored evidence of insurance. Econ. after economists have performed many empirical analyses of moral hazard. See FRANK H. Pol. See Wang et. and why courts would not likely have given much credence to a little-explored and even less-proven hypothesis to overthrow time-honored precedent. Pauly.

Thus. 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. the effects of moral hazard. IV. so moral hazard may be able to settle the score.prejudicial implications on the other hand. may admittedly be slight. moral hazard is not likely to make up a substantial part of an individual’s behavior equation. it would be such a “tendency” under this rule nonetheless. Even if some tendency was slight. Therefore. 16 . R. Moral Hazard Passes Relevance’s Low Hurdle It is not expected. Having provided a background for both the exclusionary rule and the theory and evidence of moral hazard. and hesitance among the courts is therefore understandable. This is so especially if moral hazard provides additional probative value to evidence of insurance. moral hazard should not have to have some substantial bearing on materials issues before a jury may consider it. 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. But according to the rules of evidence. nor is it reasonable to expect that moral hazard could be a gamechanging consideration for any jury debating negligence or wrongdoing. considered in detail infra. 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.81 And even though this theory relies heavily on what some consider unsettled empirical evidence. because it thus becomes less likely that any prejudicial effect will outweigh the probative value. peer-reviewed empirical studies that document the existence of moral hazard in automobile insurance and other markets should at least be 81 FED. EVID. 401. Especially considering its subtle effects. the fact that there have been credible. These rationales have long since been far from well-settled foundations for the exclusionary rule anyway.

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

for evidence with some element of untrustworthiness is customary grist for the jury mill.” Hanson & Logue. According to this hypothetical situation. 638 P. An insured homeowner who intentionally torches her home. at 202. 705 (N. 557. responding to the statement. Applying Moral Hazard With the standards of relevance in mind. “Don’t worry. 91 FED. R. 432 U.” Shaw.2d 760. Thatcher. consider again the driver mentioned at the introduction of this discussion. 80 N.” Manson v.S. 401.whether the factfinder believes certain evidence—even “tenuous”88 evidence—to be true does not bear on the admissibility of that evidence. such as arson or suicide.91 this evidence would likely be excluded under Rule 411. Juries are not so susceptible that they cannot measure intelligently the weight of identification testimony that has some questionable feature. supra note 50 at 138. that insureds sometimes engage in because they are insured.90 B. 1981). 2007 WL 1701709. EVID. FN45. Brathwaite. 65 M. FN4 (Colo. 98 (1977).” the defendant quipped. but rather bears on the weight89 the factfinder gives it in decision-making.H. You may have an accident.J. supra note 13 at 711. I carry insurance for that. at *6.” People v. 1923). but whether what they heard was believable: “The jury need not believe testimony found to be admissible. 93 In Herschensohn v. 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. 90 The jury’s province is deciding the case is not to determine whether what they heard was admissible.H. 18 . 92 “Moral hazard also includes more deliberate acts. “You ought to be a little more careful about [driving]. not to its admissibility or relevance. There are yet other blatantly obvious instances in which insurance would be an important consideration in determining liability but would nevertheless be ruled inadmissible. Though admittedly having some tendency to make the existence of that driver’s wrongdoing—the destruction of a home—more probable.” 94 Slough. You are liable to kill somebody.. Weisman. Dismissing such selfdestruction as behavior that “hardly seems rational.” 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. it was insurance’s influence that dictated this driver’s decision to drive into the homeowner’s property. See also Harrow.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. 119 A.

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. but did not give rise to liability. 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 far as insurance safeguards go.96 It follows that with insurance comes a greater probability for loss. ed.. however. 97 FED. but can that lead to liability? The following will answer these questions.” LEONARD E. 19 . this type of behavior may indeed be rare. introduction of the presence of insurance would still be irrelevant because no “material fact”—i. PROPERTY INSURANCE LITIGATOR’S HANDBOOK 332 (2007). DICKERSON. ET AL. It is a basic principle that insurance policies do not cover intentional acts. After all. MURPHY.D. But whether those losses are of the kind that give rise to a legal cause of action or liability—i. 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. EVID. citing O. 96 Pauly. insurance policies cover only fortuitous losses. if the moral hazard of an insured individual produced losses. 401. HEALTH INSURANCE 463. 1963.e. supra.97 Therefore. Admittedly so. negligence—would be rendered any more or less probable. whether those losses stem from negligence or other wrongdoing—does not follow from the definition of moral hazard alone. rev. moral hazard is defined as a loss-producing phenomenon. As mentioned. “as a general matter. .e. 95 As far as legal safeguards. it must be uncovered why moral hazard produces losses..consequences of such illustrations—instances that seem to glare in the face of Rule 411’s dismissal of any insurance as irrelevant.. and is guarded against by other legal and insurance policy safeguards95 in order to discourage these types of actions. in order for moral hazard to truly be relevant. Therefore. R. supra note 48 at 535. 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. .

Empirical evidence supports this assertion. a driver is not likely to suddenly become adopt reckless tendencies because of insurance. supra note 55. accidents) back onto the insured would re-increase their incentive to take care. If this is true. Wang et al. it should thus be easy to understand why insurance may result in a change of behavior. Therefore. 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.g. at 100. 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. Why Moral Hazard Produces Loss The question arises: “Why?” As already discussed here and by numerous scholars. found that drivers do actually respond to incentives—at least in the form of increased premiums and deductibles—to drive more carefully. Preventive care. then insurance presents a diminished “incentive to invest in preventive care”99—the responsibility for reparations would no longer be keeping the actor honest. an insured is less likely to engage in “costly” caretaking. 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.. moral hazard in essence resembles having one’s cake and eating it too: insurance 98 99 Campbell.98 As a simple example.C.. As a result. supra note 2. Jennifer Wang et al. Id. more beneficial way like working to make money. it should follow that shifting the costs of the insured service (e. 20 . while reducing the probability of various kinds of losses. 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. In light of the costs of taking precaution. 100 Id. absent unique or rare circumstances.100 which translates into more risky behavior the costs of which the insured does not have to bear.

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

if D. D. were 104 RICHARD A. B < P x L. POSNER. for example. excessive speeds or a tendency to run red lights that causes accidents with other vehicles. but ultimately. for example. resulting in a robbery.105 Suppose that an accident and injury to a certain individual can be avoided by the actions of another driver. But these victims arguably do not actually bear these losses to the extent that these injuries are fully compensated through insurance or litigation. Bystanders may suffer a loss as the victim where an insured’s diminished incentive to exercise care translates into.accidents or injuries are possibly borne by either bystanders or the insured herself. This could be in the form of the failure to preventively secure one’s insured property. 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. This is because the insureds themselves actually bear the final losses. if an insured has an insurance-rooted incentive to increase their own utility by decreasing the amount of care they exercise. The fact that insureds—instead of the victims—are paying for the losses caused by their own rational. 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. an individual has a duty to invest in precaution when the burden of doing so is less than the expected cost of the accident. 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.104 expressed by: B < P x L. 105 22 . According to Judge Hand’s theory. In Judge Hand’s equation of negligence. B = the burden of caution. P = the probability of the loss and L = the magnitude of the loss. Moreover.

courts assess reasonableness based on the total costs of the accident—not on D’s internalized costs—and. 159 F.000. 110 For simplicity’s sake.001.000—D only considers the cost that she herself must bear. but this incentive may also ultimately give rise to liability.108 D will expend the $8 investment in precaution to avoid the legal damages of $10. supra note 103 at 167. this illustration ignores legal expenses.000. would be $10. and are adapted from an example Judge Posner uses in his textbook. and accordingly chooses not to invest the now-more-expensive $8 precaution. 107 Id. and the costs of the accident.110 In deciding liability. is .000—clearly exceeding the liability he would otherwise face—with the payment of a $500 deductible. 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 $50.106 Assume the probability of the accident’s occurrence.50. While the costs of the accident remain the same—$10. It thus appears that the losses brought about by moral hazard not only originate in the diminished incentive to take care.109 D is thus apparently better off by investing in precaution.” Carroll Towing. as in this case. B < P x L. L.107 But because of the legal duty imposed when. 109 Posner. D now considers that she must only pay the cost of the deductible at $500 in the case of an accident. Further assume that driving the speed limit to avoid the accident requires an investment of $8. D will not do so. A 106 The numbers and figures are for illustration purposes only. supra note 103 at 167-68. Although efficiency would require the investment of $8 to avoid spending $10. for an individual savings of $2. legal error. 23 . though it still requires an $8 investment.2d at 171. however.001. or an expected judgment cost of $10.to drive more slowly. 108 According to Judge Hand. mental and other miscellaneous costs that may be associated with an automobile accident. without legal liability. by definition of the economic theory of negligence. P. so D’s expected cost of the accident is now a meager $0. Posner. D has breached its duty of care and would be liable for negligence. for an expected cost (P x L) of $10. If P remains . “liability depends on whether B is less than L multiplied by P.

Consider. such an inference went relatively unnoticed through the history of considering Rule 411. R. an indemnity agreement. courts have not excluded from courtroom consideration. Indeed. therefore. as will be explored in Section VI. may not have that much bearing anyway. though. courts and scholars blinded themselves with a focus on the wealth and payment implications of the introduction of insurance evidence. incentive-creating mechanisms that. 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. there is no rule explicitly prohibiting the introduction of evidence of indemnity agreements. incentives part of evidence of insurance. would indeed be justified in inferring a higher—albeit slight—probability of negligence from the existence of insurance. Incentives as Relevant Evidence in Cases Other Than Those Involving Insurance Drawing the inference of negligence from the existence of insurance. However. perhaps because of a lack of wealth implications. EVID. they would be able to at least see the relevant. So if courts were to consider insurance within the moral hazard context. Indemnity agreements operate similar to insurance contracts because. at its core.jury. it shifts financial responsibility for some cost from the indemnified individual to the one who indemnifies. More importantly. and have consequently failed to notice the part of insurance that actually has a relevant bearing on the issue of liability: the underlying incentives. 401.111 E. 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. therefore. and courts will consequently 111 FED. while possible. 24 . for example. Without considering moral hazard. and would therefore be relevant on its face.

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

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.W. and such evidence remains a type of “bête noire” after all. for example. 123 In Union Carbide v. See e. 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. 1. Contracts as Organizations.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. the principal has no way of identifying the culprit. 121 Though courts as Corbett.N. Rule 411 yet maintains its suppressive effect over evidence of insurance.121 Possibly hung up on such an ancient rule. like. L.D. 2001).. if responding to incentives to relax vigilance.2d at 257. still face risks of harm that drivers may not face.g.g.2d at 265 have considered insurance evidence to be a “bête noire” of the past.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. 120 According to contract theory. the risk of tarnishing one’s name after consistently being associated with accidents and injuries. 119 D. 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. and in the presence of multiple employees. 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. 51 Ariz. 12 (2009). Montell N. Where would be the harm. Regardless. especially because they have failed to consider any incentives associated with insurance in the first place.. Esensten.2d 130. Shea v.App. if the defendant-employer in a hypothetical wrongful termination suit offered evidence of the plaintiffemployee’s incentive to “under-invest time. 351 F.Supp. 26 . 28 F. King. 375 F. agents in a principal-agent relationship are also susceptible to moral hazard because the agent’s behavior is not directly observable by the principal. Perhaps the old stigma attached to the word “insurance” thus still remains. Id. See e. The court also held that the probative value of such evidence outweighed any prejudicial effect. Bajari et al.. 132 (Minn.2d 833 (S. at 843. 1998)..V. for example. Gordon Smith & Brayden G. supra note 65. 118 Northwest Airlines.Y. 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. courts have at least yet to address such a concern. it is possible that the stigma remains.. If this has had any influence on the disparate treatment. 622 N. Rev.

Unlike evidence of a principal-agent relationship or an indemnity agreement.pay. 401 27 . the alleged prejudicial effect from the introduction of insurance evidence may. Given the low standard of admissibility for relevant evidence. the introduction of evidence of insurance allegedly carries with it a possible prejudicial effect because of the simultaneous introduction of deeper pockets. R. In sum.124 exactly how 124 FED. whether the prejudicial effect of insurance—if there even is any—outweighs this increased probative value should also be reconsidered. negligence). too. however. 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.g. and insurance’s similarity to evidence of incentives that courts have long been admitting. 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.. this note first discusses competing inferences that may determine the likelihood that any prejudicial effect outweighs the probative value of insurance. Evidence of insurance thus has an arguably greater probative value than what has previously been considered. be a stale argument. V. And although this may be a viable reason why insurance-created incentives would be treated differently. this discussion has demonstrated a strong case for reconsidering at least the relevance of insurance on the issue of negligence or wrongdoing. 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. as this discussion will unravel in Section VI. But before this discussion turns to considerations of the alleged prejudicial effect. EVID. As a result.

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

The subsequent discussion.”129 If evidence of insurance is introduced against a presumably “responsible” insured individual. 159 (1954). 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. Blindfolding the Jury. whereas the law-abiding. 33 Tex. L. While Green believed this was one major reason for which the rule against insurance should be reconsidered. 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. insurance-buying individual is labeled as the reckless one. 129 Slough. it is doubtful whether that would affect their decision. this argument assumes—and it will be shown that this assumption is erroneous—that insurance has an appreciable impact on jury decisions. 237. Indeed. 128 Tom Baker. Rev.127 But assuming that the jury automatically awards more damages if no party mentions insurance is not the only problem with this reasoning. however. 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. whereas the irresponsible are known to peregrinate without benefit of company protection. supra note 13 at 710. Rev. While the jury may assume the presence of insurance because it is so prevalent. 127 The assumptions a jury makes about the presence of insurance is discussed. The significance of this competition is that if the character inference offsets enough of the moral hazard inference. in Section V(A). infra.importance” 126 to them. 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. 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. 29 . the net probative value of the latter is more likely to be outweighed by the danger of unfair prejudice or waste of time. responsible individual. because a jury may otherwise assume the presence of insurance if it was not discussed in the trial. 75 Tex. On the Genealogy of Moral Hazard. L. 157. “experience denotes that the most responsible and trustworthy drivers are insured. 238 (1996).

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

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

The Mystery of Uninsured Motorists Though an inference about responsibility seems to intuitively flow from the question of a motorist’s insurance status. B. the inference about character may not be clearly drawn.” Id.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. while the safest drivers purchase inexpensive policies that offer little coverage. but other empirical evidence confirms the existence of another pertinent effect called adverse selection. 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). supra note 71 at 197. The most prominent137 type of insurance market where there are these implications is the automobile insurance market. the cited adverse selection studies consider only insured parties. 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. 32 . Not only does empirical evidence of moral hazard suggest that an insured motorist would take more risks. lacks empirical evidence to support it. where low-deductible choices are correlated with more accidents and higher losses. the riskiest (and perhaps least responsible) drivers would purchase a policy that offers the most coverage. Although hypothetically possible. In fact.a competing character inference. there is much empirical evidence that opposes this position. though. Even here. 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. Cohen finds evidence of adverse selection in the automobile insurance market. and the context changes significantly when considering insured parties against uninsured parties. 138 Cohen. This is so because there still may be an intuitive.

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

. 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. What Do People Buy When They Don’t Buy Health Insurance and What Does that Say about Why They Are Uninsured?. at least fail to provide any reasonable basis on which proponents would found an argument that uninsured motorists are inherently less responsible. August 18. available at http://www. 145 The lack of empirical evidence could be for a number of reasons. INSURANCE JOURNAL. Helen Levy & Thomas DeLeire. This possibility is mentioned briefly.142 Other insurance professionals agree that it is simply a “reality” that. that quantifying carefulness when driving is difficult in terms of the type of inference that might be associated with insurance. 34 . 45 Inquiry 365 (2008). There could also be an endogeneity issue with some variable such as poverty. Jones.com/magazines/west/2003/08/18/coverstory/31590.145 The existing empirical studies. 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. feed their kids second” while insurance descends to a “distant choice. This statement is made by Texas Insurance Commissioner Jose Montemayor. C. 144 See e.percent of people in the area living below the poverty level. “given choices and a limited amount of money. infra note 145. Indeed.insurancejournal. 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. though. for example. Such an inference from the existing evidence would not only be tenuous. It could be. and is cited in: Stephanie K.144 But even if the affordability of insurance thus appears to be a significant factor that could contribute to the decision to buy insurance.”143 Results from other markets confirm the same preference of impoverished individuals. Levy and DeLeire use data from the Consumer Expenditure Survey to find that prices. Such is simply not rational. 2003. this does not mean that an inference about character for care is ruled out. In this study.g. 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. Uninsured Drivers Travel Under the Radar. most people will choose to pay their rent first.htm.

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

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

L. 1316 (Ariz. Carman v. See e. empirical evidence has demonstrated that the mentioning of insurance would not have any significant effect on the jury’s verdict. Row. Rev.. 157 Broeder. 160 Id.W.alleged prejudicial effect of insurance evidence. 465 (Tex. just as the “passage of time” has “eroded much of the danger of prejudice. 597. Imagined and Exaggerated Prejudice As early as the middle of the twentieth century.2d 462.153 It would seem. 37 . Hefter.. 158 Susan A. A. 169 S.2d 1312. many scholars began to be unconvinced that evidence of insurance would even sway in the slightest a jury’s decision. supra note 38 at 744. Shouldn’t We Consider…? 14 Psychol. if it knows that the defendant is protected by insurance. One recent study analyzed jury deliberations following the simulation of an automobile negligence trial that was based upon the facts of an actual case. 601. Duncan. Id. 1943). Indeed.. 1230 (1985). that if moral hazard is able to establish some positive probative value.157 the passage of time has eroded the significance of such early studies. 136 Ariz. turning first to the position that the introduction of insurance does not yield any prejudice in the first place.g. then. Admissibility of Insurance Policy Limits. 1299. 156 Courts have questioned whether the rule itself was not “rather archaic” because of a lack of prejudice. 194.g. supra note 77 at 193. and for a larger amount. and then turns to consideration given an assumption of at least some prejudicial effect. Pub.”155 some have tested the archaic156 allegation to determine whether there is any prejudice against the defendant. See e.. at 201. 1983). Pol’y & L. 159 Edith Greene et al. 667 P. 516.160 Varying the severity of 153 154 See Relevancy and its Limits. 140 Tex.”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. 510. This discussion will now further explore this argument. 45 La. 194 (2008). the argument against the likelihood of prejudice is even stronger.154 Disbelieving that “a jury is more apt to render a judgment against a defendant. 155 Barrington v. While early studies seemed to suggest that mentioning or instructing the jury regarding insurance resulted in skewed verdict amounts.

at 210. 597.165 But even before states began passing legislation requiring liability insurance.162 Moreover. meaning that these topics did not significantly affect the amount of damages. 160. the court reasons that because of recent mandates regarding the requirement of mandatory insurance. all 50 states have set certain minimum requirements for liability coverage. 1316 (Ariz. for example. 55 Md. Appendix C (1996).2d 548 (Miss.2d 1312. at least with regard to automobile insurance. Presently. 163 Id. 166 Carman v. unlike in the 1950’s when the earlier study was performed. 1983). or the case would not even be in court. jurors are already aware that insurance companies are involved in the litigation. 164 In Mitchell v. introducing evidence of insurance would not illicit the same surprised. Id. settlement discussions and attorney’s fees) together accounted for only 3% of the variance in award size. 819 So.163 A possible explanation for the disparity between studies is the fact that.. Hefter.161 Using regression analysis. coverage was sufficiently prevalent such that courts recognized that jurors were sophisticated enough to presume the defendant had 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. 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. 38 . 601. L.App. 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. 667 P. Rev. especially164 because. 136 Ariz. Mitchell v. Glimm. Glimm. at 211. head-turning reaction that it may have before the prevalence of insurance.injuries and reprehensibility of the defendant’s conduct..166 And jurors may just as easily recognize that automobile 161 162 Id. the study also discovered that forbidden topics (including insurance. The Comparative Costs of Allowing Consumer Choice for Auto Insurance in All Fifty States. 165 O’Connell et al. 2002).

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

173 however. Soloman. if there is any need to do so—to disregard insurance with respect to awarding damages. 173 A Second Circuit court.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.2d at 270. supra note 38 at 744. for example.2d 866. 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. Some studies172 and even courts. Nevertheless.. have suggested that instructing the jury on insurance would only remind the jurors of insurance—as if. 405 F. whether any existed or not. 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. might even take the issue with them into 171 172 Corbett. by the end of the case. the jurors would have forgotten a reference to something they more than likely would have already assumed. courts saw limiting instructions as a fitting means by which they could ensure that from evidence of insurance. but to consider only the relevant part of insurance evidence. if not instructed on the issue. 375 F. But because insurance is now more prevalent than it has been in the past. or. jurors would get the most relevant facts about bias. control or agency without any of the prejudicial affect. 867 (2nd Cir.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. 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. Broeder. it is more likely than ever that juries.” 40 . in Cuccarese v. whether insurance caused an individual to be more or less negligent.

347 F. jurors would not make the same assumptions about the involvement of an insurer. that nearly a century of legal precedent was based on a wholly erroneous presumption of prejudice. 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. Van Schaik.the jury deliberation room. Kiernan v. 157 (1954).177 Instruction may thus be a proper way of avoiding potential prejudice or a wayward jury. 178 In Cuccarese v. because insurance is not as prevalent in the relevant market. for example.”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. this discussion concedes that the prejudice eroded only because of juror’s recognition that most drivers have insurance.” 33 Tex.174 mistaking it for a relevant consideration.. 179 Edith Greene’s study observed jurors’ reaction in the recreation of only an automobile negligence trial. 1969). speculation and paradoxically lead to the inconsistent and unpredictable verdicts and uncontrolled decision making that it was intended to curtail.” 33 Tex. 175 Kiernan v. Therefore. Greene et al.. then. 405 F.178 And even though empirical evidence demonstrates how mentioning insurance will not affect verdicts or the amounts of such. supra note 158 at 195.2d 775. “Blindfolding the Jury. It is not likely. 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. 177 See e.g. 782 (3rd Cir... supra note 158 at 194. L. Van Schaik. Even though jurors may still make assumptions about insurance in cases involving 41 . L. “Blindfolding the Jury. though. 782 (3rd Cir.2d 866. it is unclear how much of this conclusion is explained by the fact that jurors presume the existence of insurance in the automobile market. rather than restrain.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. 1965). 1965). the court acknowledged that jurors may well be familiar with the prevalence of automobile insurance.. There still may be lawsuits where. Rev.2d 775. Leon Green. Soloman. 176 Greene et al. 347 F. and could even produce the specific guidance jurors need to handle evidence of insurance that they may otherwise misuse. Rev. To give some credit to the historical argument.” The court consequently found that the introduction of such evidence may well have been the source of substantial prejudice. Leon Green. 157 (1954). 867 (2d Cir.

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

Despite practical difficulties. moral hazard nevertheless implies the relevance of evidence of insurance and that the blanket exclusion under Rule 411 deserves another look. CONCLUSION This discussion has explored the implications of considering moral hazard in the framework of the underlying policies of Rule 411. though. if not barred by an undue prejudice. unlike that which scholars had previously considered. While moral hazard has yet to surface in the literature as a possible justification for allowing evidence of insurance on the issue of negligence. Allowing the admission of insurance evidence. insured individuals face a diminished incentive to exercise care—the response to which. could be blocked by the “waste of time” or “confusion of the issues” standards under the same rule. Most important.VII. 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. may be subtle and subconscious. it may admittedly have limited practicality in a courtroom. 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. for example. this discussion has demonstrated that it certainly warrants either judicial or legislative consideration. wasting both time and money of litigants. Because of moral hazard. This discussion has also explained how. 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. 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. 43 .

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