Insurance Structure and Class-Action Settlements

Abstract

This paper examines an aspect of Security Class Action dynamics that has not been previously analyzed using game theory: the effects of fragmentation of interests across the insured defendant and potentially multiple-insurers who are all subject to losses under the class action. Incentive conflicts within the defense coalition not only affects the settlements reached but can result in different level of settlements in cases which are of similar merit (operationalized as facing the same loss function should the case go to trial). Our paper provides an explanation for such outcomes even if the legal system is not subject to any obvious form of inefficiency.