Article by Ian Ayres and Peter Siegelman
On March 22, 1988, the Attorneys General of eight states filed antitrust actions in state and federal courts alleging that major insurance and reinsurance companies colluded to boycott specific types of insurance coverage in violation of section 1 of the Sherman Act. The suits suggest that this collusion was responsible for the unprecedented increase in premiums and concomitant erosion of coverage that has come to be known as “the insurance crisis.” The lawsuits have provoked fierce denials by insurance industry participants, including assertions that the suits, which came in an election year, were politically motivated. The litigation is certain to involve some of the country's highest-paid law firms in a protracted struggle that, by all estimates, will cost many millions of dollars.
The allegations of collusion, however, are directly at odds with one prominent explanation of the insurance crisis. In a recent article, Professor George Priest specifically rejects the view that “the insurance crisis has been caused by explicit pricefixing by commercial casualty insurers.” Instead, he offers an alternative theory that explains the breakdown in insurance markets by the judicial expansion of liability that caused markets for certain types of insurance coverage to unravel.
The insurance industry's first public response might be interpreted as a demurrer--even taken as true, the allegations do not describe illegal behavior. Important facts in the case have not yet emerged or are in dispute. Nevertheless, we seek to evaluate the credibility of various explanations of the defendants' behavior before society devotes the immense resources necessary to litigate an antitrust suit of this proportion. Using the lens of economic theory, we examine whether the states' case is plausible taking the facts set forth in the complaints as true. This Article will therefore analyze, under a demurrer standard, whether a coherent economic theory underlies the plaintiffs' Sherman Act claims.
In the first section, we set out the alleged facts and describe the states' theory of the case. The second section not only criticizes the economic plausibility of the collusive explanation, but also finds Priest's competitive explanation to be at odds with the alleged facts. The final section argues that an exclusionary explanation may provide the best factual fit, although discovery is warranted.
About the Author
Ian Ayres. Assistant Professor of Law, Northwestern University; Research Fellow, American Bar Foundation; J.D. 1986, Yale University; Ph.D. (economics) 1988, M.I.T. Editor's note: After this Article was written, the plaintiff states in the pending antitrust litigation retained Professor Ayres as an economic expert.
Peter Siegelman. Research Fellow, American Bar Foundation; B.A. 1978, Swarthmore College; Ph.D. candidate (economics), Yale University.
Citation
63 Tul. L. Rev. 971 (1989)