Deterring Fraud: The Role of General Damage Awards in Automobile Insurance Settlements

Awards for pain and suffering and other noneconomic losses account for over half of all damages awarded under third‐party auto insurance bodily injury settlements. This article hypothesizes that third‐party insurers use general damage awards to reduce the incentive to submit exaggerated claims for specific damages for injuries and lost wages. Consistent with this hypothesis, the article finds evidence using data on over 17,000 closed bodily injury claims that special damage claims that exceed their expected value receive proportionally lower general damage awards than claims that do not. Among the implications of this research is the possibility that insurers will be less zealous in challenging fraudulent special damage claims under a third‐party insurance regime than they will be under a first‐party insurance regime in which access to general damages is limited.