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72 Tex. L. Rev. 1375 (1993-1994)
Solving the Judgment-Proof Problem

handle is hein.journals/tlr72 and id is 1409 raw text is: Solving the Judgment-Proof Problem Kyle D. Logue* A tortfeasor' who cannot fully pay for the harms that it causes is said to be judgment proof. Commentators have long recognized that the exis- tence ofjudgment-proof tortfeasors seriously undermines the deterrence and insurance goals of tort law.2 The deterrence goal is undermined because, irrespective of the liability rule, judgment-proof tortfeasors will not fully internalize the costs of the accidents they cause. The insurance goal will be undermined to the extent that the judgment-proof tortfeasor will not be able to compensate fully its victims and that first-party insurance markets do not provide an adequate response? Liability insurance can ameliorate these so-called judgment-proof problems in two ways: First, if liability insurance is experience rated or feature rated,' the presence of such insurance can induce tortfeasors to take appropriate steps to prevent * Assistant Professor, University of Michigan Law School. B.A. 1987, Auburn University; J.D. 1990, Yale Law School. I am grateful to Steve Croley, Jon Hanson, Avery Katz, Charles Silver, and Kent Syverud for their comments and to Marta Almli for research assistance. 1. A tortfeasor in this context is a party who has been involved in an accident that results in an injury to another and who has some chance of being held liable in tort for causing that injury. 2. For a discussion of the deterrence and insurance goals of tort law, see infra text accompanying notes 63-64. For examples of scholarly works that address, directly or indirectly, the effects of the judgment-proof problem on the deterrence and insurance goals of tort law, see Steven Shavell, The Judgment Proof Problem, 6 INT'L REV. LAW & EcON. 45 (1986) (noting that judgment-proof parties do not have the appropriate incentive either to prevent accidents or to purchase liability insurance); Henry Hansmann & Reinier Kraakman, Toward Unlimited Shareholder Liabili y for Corporate Torts, 100 YA L.J. 1879, 1882-83 (1991) (discussing the implications ofjudgment-proofproblems that arise in the context of the limited liability of corporate shareholdera); John G. Fleming, Report to the Joint Committee of the Calfornia Legislature on Tort Liability on the Problems Associated with American Motorcycle Association v. Superior Court, 30 HAMNas LJ. 1465, 1470 (1979) (noting the role of liability insurance in alleviating the judgment-proof problem); William R. Keeton & Evan Kwerel, Externalities in Automobile Insurance and the Underinsured Driver Problem, 27 J.L. & ECON. 149, 149-50 (1984) (documenting the extent of judgment-proof-driver problems and examining their effect on the demand for liability insurance); John Summers, Comment, The Case of the Disappearing Defendant: An Economic Analysis, 132 U. PA. L. REV. 145, 145 (1983) (noting both the deterrence and the insurance aspects of the judgment-proof problem). 3. A victim in this context is a party who has suffered an injury as a result of an accident that involved another party. 4. Insurers feature-rate when they adjust premiums to reflect the safety-level of an insured's activities. Insurers experience-rate when they adjust premiums to reflect the actual loss experience of the insured. KENNETH S. ABRAHAM, D1STRIBUTING RISK 46 (1986). 1375

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