Self-Insuring against Liability Risk: Evidence from Physicians’ Home Values in States with Unlimited Homestead Exemptions

We study whether individuals self-insure against uninsured liability risk by exploiting variations in state laws that allow individuals to protect some portion of the value of their homes against creditors. We test whether physicians take advantage of these laws to invest more in their homes to protect assets from malpractice claims exceeding liability policy limits. In states with unlimited homestead exceptions—laws that protect home equity from recovery by creditors—physicians invest 13 percent more in home value than in the absence of an exemption. Effects are larger where liability risk is greater; no effect occurs for other professionals of similar family income, family size, demographics, and city of residence.

Our evidence suggests that individuals manipulate their financial assets to self-insure against liability risk when insurance markets are incomplete.