If you are not reading the Kilpatrick Townsend “Global Insurance Recovery Blog,” you should be. I particularly enjoyed a recent post from co-editor Carl Salisbury: “The (Mis)Application of ‘Moral Hazard’ to Insurance.”

Carl’s post was spurred on by a recent Illinois state appeals court decision finding coverage for an insured’s violation of the Junk Fax statute. Carl noted that “the court lamented that the decision, however correct under the language of the policy, created incentives for people to violate the TCPA in the future, thus tending to defeat the purpose of the statute.  This notion that the existence of insurance makes people behave badly is an old one.  It is also wrong.”

The post takes aim at courts that deny coverage on the basis of “moral hazard,” the concept that people are more willing to engage in risky behavior if the cost of doing so will be borne by another. Carl argues that, for many reasons, courts should stop using moral hazard in judicial analysis of the availability of insurance coverage. As he points out, don’t all insurance contracts create a moral hazard that eliminates incentives for good behavior?  Yet, he notes, fire insurance policies do not inspire people to play with matches.

The post caught my eye because I’ve always found the moral hazard concept to be an interesting one. On one hand, it has an attractive and common sense appeal, e.g., insure punitive damages and people will be more willing to engage in conduct that they know could cause injury to others. But do people really act like this? Is moral hazard really an accurate portrayal of human behavior? Or is it only convincing in law review articles, written by those in the patches-on-the-sleeve set, for others in the patches-on-the-sleeve set ?

Carl’s post also grabbed my attention because I recalled that a court, in a coverage decision not too long ago, addressed moral hazard and tossed the argument aside. In Beaumont Hospital v. Federal Insurance Company, No. 13-1468 (6th Cir. Jan. 16, 2014), the Sixth Circuit addressed an insurer’s argument that moral hazard should prevent it from having to provide coverage to a hospital for the return of money wrongfully withheld. Otherwise, the insurer argued, it would incentivize wrongful behavior.

But the court did not agree: “While we must consider whether insurance coverage may encourage moral hazards, we have previously addressed this issue, noting that common sense suggests that the prospect of escalating insurance costs and the trauma of litigation, to say nothing of the risk of uninsurable punitive damages, would normally neutralize any stimulative tendency the insurance might have. (citations and internal quotes omitted). Here, in addition to the damage to the reputation of Beaumont, the hospital also faced up to $1.8 billion in damages. The Policy limit for anti-trust claims is $25 million—far less than the threatened $1.8 billion which the plaintiffs sought jointly and severally from Beaumont. No insured is likely to bet on a gain of $25 million against a loss of $1.8 billion.”

Check out Carl Salisbury’s article and, more generally, the Kilpatrick Townsend “Global Insurance Recovery Blog.” There are so many things competing for your screen time these days – blogs, articles, newsletters, news sites, law firm alerts and e-mails from Nigerian Princes. The KT blog deserves your time. It really stands out in a crowded field.