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The complementary roles of liability, regulation and insurance in safety management: theory and practice

Liability rules, regulation and insurance have all been proposed in legal and economic theory as instruments to prevent safety risks created by enterprises. Moreover, these rules can also be found in combination in most legal systems. Indeed, liability rules are often advanced as the market solution to safety since they simply allocate a price to unsafe behaviour by signalling that the operator will have to compensate the victims in case of an accident (strict liability) or when the accident was caused through his fault (negligence). Liability rules are thus supposed to have a deterrent effect and should thus promote safety management within enterprises. However, law and economics literature has also clearly pointed at the shortcomings of liability rules in preventing risks: information may be better available with the regulator; the deterrent effect of liability rules can fail as a result of latency, problems of proof and causal uncertainty and insolvency problems may equally limit the deterrent effect of tort rules. That is why many risks posed by industry are often controlled via ex ante safety regulation. However, regulation has its limits as well (more particularly the fact that they can become outdated quickly since they are often static rather than dynamic; that they need a strong enforcement in order to be effective and that regulatory standards may be inefficient as a result of lobbying by private interests). That is why it is suggested that liability rules may still play an important complementary role even in cases where industrial risks are primarily controlled via safety regulation.