The system of liability and malpractice insurance is deeply flawed because incentives drive up litigation costs instead of resolving issues efficiently. While insurance companies give lip service to the legal profession, in actuality they enjoy the cycle of rising expenses (and increased revenue and profit.) To truly grasp the problem, it’s necessary to examine the economic motivations behind each party, especially how insurers, lawyers, and clients are affected by increasing claims and high-stakes lawsuits.
How Incentives Fuel the Cycle
Insurance companies make money by collecting premiums and investing them; higher litigation costs justify raising premiums and expanding coverage limits, which boosts their revenues and profit margins.
Physicians face rising costs from potential or real lawsuits, encouraging them to buy more or higher-limit insurance and sometimes opt to settle cases rather than risk a costly trial, even when they’re not clearly at fault. This risk-averse behavior increases reporting, drives up claims statistics, and leads insurers to further raise premiums.
Parallels in Other Insurance Sectors
This cycle isn’t unique to malpractice insurance; similar incentive dynamics exist in auto and homeowner liability insurance, where higher litigation and claim costs drive up premiums and defensive policy structures.
Real-World Consequences
In states like Florida, continually escalating insurance costs and litigation risks have overwhelmed the system, leading to market instability and insurer exits, making coverage hard to obtain. This shows how perverse incentives don’t just impact costs—they can disrupt entire industries and harm consumers who need coverage and services.
Understanding these incentive structures and “following the money” reveals why meaningful reform is so difficult: when profits depend on high litigation, every part of the system tends to reinforce the status quo instead of solving the root problem and making meaningful report (especially with the insurance and legal industry lobbying our elected officials.)
Dr Bob, Brain Mechanic 