Law Commons^™

Playing With Fire? Testing Moral Hazard In Homeowners Insurance Valued Policies, Peter Molk

Utah Law Review

Insurance policy design and regulation continually grapples with moral hazard concerns. Yet these concerns rest largely on theory-based assumptions about how rational economic actors will respond to financial incentives. Advances in behavioral economics call these assumptions into question.

This Article conducts an empirical test of moral hazard in homeowners insurance markets. Eighteen states’ “valued policy” laws require more generous compensation by insurers for certain total house losses. I test the moral hazard prediction that fire rates will consequently be higher in these states than in others. Using a private insurance database on the cause of loss for over four million …