Subrogation and its consequences for tort litigation

•The paper considers the effect of subrogation on personal injury litigation.•One issue is whether the increasing use of subrogation will cause a decline in tort litigation.•We analyze subrogation with an extensive-form game.•Our model assumes all parties are risk-neutral and have full information.•We find no loss of tort liability or deterrence of tortfeasors resulting from subrogation under either the American or English rule. In the U.S. tort recoveries of personal injury victims are now fully subject to subrogation claims by public and private health insurers who have previously covered the victim's health care expenses. We use an extensive-form game to model decisions that must be made by insurers when their insured party has been injured and sues for damages. If the insurer decides to join the lawsuit, it must decide how much, if anything, it will contribute to the legal expenses of the plaintiff. We find that that with perfect information and risk-neutral parties there is no loss of tort liability and deterrence: the parties’ actions under a subrogation regime will be identical to what they would have been without subrogation. These results are somewhat counterintuitive, and in some instances may have been contradicted by the actual decisions of insurers, but are quite consistent with one remarkable development: many health insurers now take the initiative to contact the plaintiff's lawyer to inform her that they will make a payment for her services.