Credit Transaction Insurance: How Does It Work?

[Randrew]

So I’m trying to convince a few of my friends (and my mother) that it is possible to successfully fund the government without coercive taxation. I mentioned the ideas of government lottery and donation, but those quickly fell prey to the typical cynicism.

Anyway, it seems that much more has been said about the method of insurance payments for contractual fraud protection, both in the well-known VOS essay and in various threads here. But I do not understand precisely why people would want to pay these fees. (Once again, I apologize for my naivete.)

Specifically: could someone give me some examples of how one could be defrauded in transactions? Furthermore, even if one were defrauded, couldn’t the offender be sued and also be required to pay the court costs?

[softwareNerd]

A close-to-home example, which is not insurance, but still illustrates why a lender would want extra protection: When someone who does not have any credit history -- say someone who is just starting to work -- wants to get an auto-loan, the lender will often only give the loan if someone else signs on as a guarantor. Do you see why a lender would want this, even though he can sue the borrower for non-payment?

In the typical auto-loan, the guarantor is a family member or a friend. Sometimes -- e.g. in foreign trade -- a specialized insurance company will issue a guarantee. They will usually charge a fee for that guarantee. In home-loans, "PMI" is a similar payment.

As for government financing, I don't remember the VoS reference. Could you quote a sentence. That'll help me check it out on the Research-CD.

[DavidOdden]

Anyway, it seems that much more has been said about the method of insurance payments for contractual fraud protection, both in the well-known VOS essay and in various threads here. But I do not understand precisely why people would want to pay these fees.

The idea is not just about fraud, but enforcement. If A agrees to do something for B but (apparently) doesn't do it, who decides if he did actually do it, and if he didn't, who forces him to make good (and in what way). The courts, of course. But who pays for the courts? The contracting parties. And what if they don't pay the fee? Then the courts will not enforce the contract. So what is the point of a contract if it is not enforceable? (See VOS p. 136)

[Groovenstein]

So I’m trying to convince a few of my friends (and my mother) that it is possible to successfully fund the government without coercive taxation. I mentioned the ideas of government lottery and donation, but those quickly fell prey to the typical cynicism.

I'm really glad you posted this because it helped me realize the existence of an important issue when discussing government reduction with people. Thanks! Look at this section I quoted and note what it's missing. You talk about funding the government through lottery and/or donation. But you don't mention how much funding would be needed.

I know this is a thread about methods, and perhaps you mentioned the amount in your conversation, but it still makes me think. I wonder if that "typical cynicism" you mention, which I also have encountered, would be reduced if that argument about the proper methods of funding was presented alongside a detailed argument about the amount of necessary funding. (As an example, I think the judiciary makes up something like 1% of the federal budget.)

[Groovenstein]

But I do not understand precisely why people would want to pay these fees.

^^^What David said. Plus, the fees would probably be based on a percentage of the contract. Thus, the poor and rich alike could and would have incentives to pay them. Pepsi's not going to have a billion dollar contract without paying the 10 mil or whatever to ensure enforcement. I wonder if contract insurance companies wouldn't step up for these big transactions?

Specifically: could someone give me some examples of how one could be defrauded in transactions? Furthermore, even if one were defrauded, couldn’t the offender be sued and also be required to pay the court costs?

You can be defrauded when the other party makes a material misrepresentation on which you justifiably rely and because of which you suffer damage. To give you a specific example:

In the course of discussions about selling you my house, you ask me if I have any termite problems. (material) I know that I do, but I say no. (misrepresentation) You sell your house, buy mine, and have to get a new one a few months later when termites eat it inside out. You have to stay in a hotel while you wait to get a new house. (justifiable reliance and damage)

As far as costs go, generally each party pays its own costs. There are specific statutes and rules that provide for costs but those are the exception in America. If my recollection of English law is correct, they have more of a "loser pays" type system.

[Randrew]

Thanks for all the replies on such short notice! I'd forgotten how eager the members on this forum are, having been inactive myself for awhile now.

Groovenstein:

I wonder if that "typical cynicism" you mention, which I also have encountered, would be reduced if that argument about the proper methods of funding was presented alongside a detailed argument about the amount of necessary funding

I agree wholeheartedly. Unfortunately, I do not know much about the particulars of government and economics, so I could easily get out-debated by those who do. Ultimately I just have to accept that I can't solve everyone's problems, so I just have to do my best to induce others to at least consider different ways of thinking.

I believe in an earlier political thread, titled "Taxes: How does Govt Fund itself without taxes," Michael Smith (user "AisA") gave an extensive response to this specific question: he outlined the typical costs of proper government functions, and showed that credit transaction insurance alone would suffice to pay for this. (Here is the link to his post. Scroll down to post #83.)

My difficulty is in understanding which kinds of transactions will *almost always* want to be insured by the parties in question.

About the example on house/termites:

In the course of discussions about selling you my house, you ask me if I have any termite problems. (material) I know that I do, but I say no. (misrepresentation) You sell your house, buy mine, and have to get a new one a few months later when termites eat it inside out.

Hm, well...I suppose you could have a contract that says "I swear that my house does not have termites or any other major structural or maintenance problems", but it would surely include lots of fine print; and who takes the time to read all the fine print these days? It just seems to me that most people wouldn't bother with these kinds of transaction insurances. But maybe enough people would get them to fund at least the courts.

Which brings up another issue: shouldn't the contract enforcement fees pay solely for the courts, i.e. for contract enforcement?

[colin]

One of the major difficulties with suing someone who has defauded you or wronged you in some other compensable way, is that the person you sue may not, and usually does not, have any money to pay on any judgement you may receive.

As for whether people would purchase such policies, they already do, in the form of performance bonds, title insurance and other ways.

Edited October 27, 2005 by colin