Chapter 23
Auto Insurance
and Society
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Agenda
• Approaches for Compensating Auto
Accident Victims
• Auto Insurance for High-Risk Drivers
• Cost of Auto Insurance
• Shopping for Auto Insurance
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23-2
Approaches for Compensating Auto
Accident Victims
• Many accident victims are unable to recover damages
– The negligent driver may be uninsured or underinsured
• States use a number of approaches to protect accident victims
from irresponsible or reckless drivers
• A financial responsibility law requires motorists to furnish proof
of financial responsibility up to certain minimum dollar limits
– Proof is required:
• After an accident involving bodily injury or property damage over a
certain amount
• Upon failure to pay a final judgment resulting from an auto accident
• Following a conviction for certain offenses, such as DUI
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23-3
Approaches for Compensating Auto
Accident Victims
• Evidence of financial responsibility can be provided in several
ways:
– Producing evidence of an auto liability insurance policy with at
least certain minimum limits
– Posting a bond
– Depositing the amount required by law
– Showing that the person is a qualified self-insurer
• Financial responsibility laws provide only limited protection
against irresponsible motorists
– There is no guarantee that all accident victim will be paid
• The victim may not be paid if injured by an uninsured driver, hit-andrun driver, or driver of a stolen car
– State laws require only minimum liability limits, which are
relatively low
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23-4
Approaches for Compensating Auto
Accident Victims
• A compulsory insurance law requires motorists to carry at
least a minimum amount of liability insurance before the
vehicle can be licensed or registered
– Some argue that the law provides greater protection against
uninsured drivers because motorists must provide evidence of
financial responsibility before an accident occurs
– Critics cite: mandatory insurance does not reduce the number
of uninsured drivers
• There is no correlation between compulsory insurance laws and the
number of uninsured vehicles on the highway
– Computer reporting systems to track uninsured motorists have
not been effective
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Exhibit 23.1 Automobile Financial Responsibility
Limits by State (cont.)
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Exhibit 23.1
Automobile
Financial
Responsibility
Limits by State
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23-7
Approaches for Compensating Auto
Accident Victims
• Five states (MD, MI, NJ, NY, ND) have established
unsatisfied judgment funds for compensating auto accident
victims who have exhausted all other means of recovery
– The accident must obtain a judgment against the negligent
motorist and show that the judgment cannot be collected
– The amount paid by the fund is limited by state law and may
be reduced by collateral sources
– The negligent driver must repay the fund
– States use different methods for financing the benefits, e.g.,
through insurer assessments
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23-8
Approaches for Compensating Auto
Accident Victims
• Many states require uninsured motorists coverage
– The injured person’s insurer agrees to compensate for bodily
injury caused by an uninsured motorist, a hit-and-run driver, or a
negligent driver whose insurer is insolvent
• Some states include property damage losses
– One advantage is that claim settlement is faster than a tort
liability lawsuit
– The injured person must establish that the uninsured motorist is
legally liable for the accident
– The minimum limits are low, so an accident victim may not be
fully compensated
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23-9
Approaches for Compensating Auto
Accident Victims
• Low-cost auto insurance provides minimum
amounts of liability insurance at reduced rates to
motorists who cannot afford regular insurance
– Goal is to reduce the number of uninsured drivers
– A pilot program in California does not appear to be
effective
• Many drivers still find auto insurance to be too expensive
• Several states have enacted “no pay, no play”
laws which prohibit uninsured motorists from
suing negligent drivers for noneconomic damages
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23-10
No-fault Auto Insurance
• No-fault auto insurance is another method for compensating
injured accident victims
• About half of the states have no-fault auto insurance laws in
effect
– After an auto accident involving bodily injury, each party
collects from his or her own insurer regardless of fault
– Enacted because of dissatisfaction and defects in the traditional
tort liability system
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23-11
No-fault Auto Insurance
• No-fault plans vary among the states:
– Under a pure no-fault plan, accident victims cannot sue
at all, regardless of the amount of the claim
• No states have enacted a pure no-fault plan
– Under a modified no-fault plan, victims have a limited
right to sue:
• In some states, an injured driver may sue if the bodily
injury claim exceeds a certain monetary threshold
• In some states, an injured driver may sue if the bodily
injury claim exceeds a verbal threshold, e.g., if the injury
involves death, dismemberment, disfigurement, or
permanent loss of a bodily member or function
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23-12
No-fault Auto Insurance
– An add-on plan pays benefits to an accident
victim without regard to fault, and the injured
person has the right to sue the negligent driver
who caused the accident
• Not a true no-fault plan
– Under a choice no-fault plan, motorists can
elect to be covered under the state’s no-fault
law and pay lower premiums
• Or, they can retain the right to sue under the tort
liability system and pay higher premiums
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No-fault Auto Insurance
• No-fault benefits are provided by adding an
endorsement to an auto insurance policy
– Benefits are restricted to the injured person’s economic
loss, which includes:
•
•
•
•
•
Medical expenses
Loss of earnings
Essential services expenses, e.g., housework
Funeral expenses
Survivors’ loss benefits, i.e., periodic payments to a
surviving spouse and dependent children
– In some states, insurers must also offer optional no-fault
benefits above the prescribed minimums
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23-14
No-fault Auto Insurance
• The right to sue varies across states with no-fault or add-on
plans
– All states permit a lawsuit in the event of a serious injury
• No-fault laws cover only bodily injury and not property
damage
– Except in Michigan
– Motorists are allowed to sue the negligent driver for property
damage
• Cases are usually small and resolved quickly
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23-15
No-fault Auto Insurance
• Arguments in support of no-fault laws include:
– Difficulty in determining fault
– Inequity in claim payments
• Serious claims may be underpaid
– High transactions costs and attorney fees
• Less than half of all tort dollars reach injured victims
– Fraudulent and inflated claims
• When pain and suffering awards are based on a multiple of medical
expenses and wage loss, claimants have a powerful incentive to inflate
their claims
– Delay in payments
• Many claims are not paid promptly because of the time consumed by
investigation, negotiation, and waiting for a court date
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23-16
No-fault Auto Insurance
• Arguments against no-fault laws include:
– Defects of present system are exaggerated
– Savings from no-fault are exaggerated
– Court delays are confined to a few large cities
– Safe drivers may be penalized by no-fault
• The rating system may inequitably allocate accident costs to the
drivers who are not at fault, thus raising their premiums
– No-fault provides no payment for pain and suffering
– The present tort liability system should be improved, not junked
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23-17
No-fault Auto Insurance
• Some states have repealed their no-fault laws
because relatively low monetary thresholds have
increased the number of lawsuits
• A study by the Institute for Civil Justice found
that no-fault plans:
– reduce attorney fees and claim processing costs
– match the compensation received for an injury more
closely with the economic loss sustained
– generally pay benefits more quickly
• The study concluded that savings from a no-fault
plan depend on the provisions in the plan
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23-18
Auto Insurance for High Risk Drivers
• High risk drivers who have difficulty obtaining auto insurance in
the voluntary market can obtain insurance in the shared
(residual) market
– These are typically younger drivers, drivers with poor driving
records, and drivers with convictions for drunk driving
• Most states have an auto insurance plan (assigned risk plan)
that makes auto insurance available to motorists who are
unable to obtain insurance in the voluntary market
– All auto insurers in the state are assigned a proportionate share of
high-risk drivers, depending on their total volume of auto
insurance premiums written in the state
– Premiums charged are substantially higher than those charged in
the voluntary markets
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Exhibit 23.2 Example of an Automobile
Insurance Plan (Generalized)
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Auto Insurance for High Risk Drivers
• A few states have established a joint underwriting
association (JUA), in which auto insurers in the state
participate in providing coverage to high-risk drivers
through a common pool
– Each insurer pays its pro rata share of pool losses and
expenses
– The JUA designs the policies and sets the rates
– Underwriting losses are proportionately shared by the
companies based on premiums written in the state
– A limited number of insurers are designated as servicing
insurers, but all insurers participate in the pool
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23-21
Auto Insurance for High Risk Drivers
• A few states have established a reinsurance facility (or pool)
for placing high-risk drivers
– Insurers must accept all applicants
• If the applicant is considered a high-risk driver, the insurer has the
option of placing the driver in the reinsurance pool
– Underwriting losses are shared by all auto insurers in the state
• The Maryland Automobile Insurance Fund is a state fund that
provides insurance to high-risk drivers who have been
canceled or refused insurance by private insurers
• Specialty insurers are insurers that specialize in insuring
motorists with poor driving records
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23-22
Cost of Auto Insurance
• Auto insurance rates have increased in recent years due to:
– Rising medical and higher motor vehicle repair costs
– Soaring jury awards in liability cases
– Insurance fraud and abuse
• Insurers use a variety of factors to establish auto insurance
premiums, including:
–
–
–
–
–
Territory
Age, gender, and marital status
Use of the auto
Driver education
Number and types of cars
• A multicar discount is available if the insured owns two or more cars
– Good student discount
– Individual driving record
• Many insurers offer a safe driver plan for drivers with clean records
– An insurance score, based on an applicant’s credit record
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23-23
Exhibit 23.3 Top Five Most Expensive and Least
Expensive Cities for Automobile Insurance, 2007*
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Exhibit 23.4 Drivers in Motor Vehicle
Crashes by Age, 2006
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Exhibit 23.5 Tips for Buying Auto Insurance
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Exhibit 23.6 Wide Variation in Auto Insurance Premiums
for Omaha, Nebraska (Six-Month Premiums: August 1, 2009
Rates (cont.)
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Exhibit 23.6 Wide Variation in Auto Insurance Premiums
for Omaha, Nebraska (Six-Month Premiums: August 1, 2009
Rates
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