Encouraging Safety Through Insurance. Based Incentives: Financial Responsibility for Hazardous Wastes

Financial responsibility provisions require firms whose activities involve risks of damages exceeding their net worth to maintain minimum levels of insurance.Incentives created by policy conditions and premium schedules arising under mandatory insurance schemes can significantly strengthen the deterrent effects of liability rules and provide a valuable supplement to regulatory safety standards.These incentives can only arise, however, if two conditions are met.First, insurers must be able to monitor insureds' safety practices at reasonable cost.Second, applicable liability standards must allow insurers to predict liability on the basis of safety practices.These requirements create a tension between deterrent aims, which favor easy enforcement of insureds' obligations and a tight link between actions and liability, and compensatory aims, which are often served by restrictions on insurers' ability to limit coverage and by attenuated links between actions and liability.The appropriate balance between deterrent and compensatory aims in any given context depends largely on the benefits that can be obtained by supplementing direct safety regulation with insurance-based incentives.This Note examines the preconditions and potential benefits of deterring accidents through financial responsibility.The Note then applies these general insights to financial responsibility requirements and liability standards pertaining to hazardous waste management, arguing that the potential benefits of insurance-based incentives in this area justify revision of existing financial responsibility and liability standards.I.