Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 23 Auto Insurance and Society

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Agenda Approaches for Compensating Auto Accident Victims Auto Insurance for High Risk Drivers Cost of Auto Insurance Shopping for Auto Insurance

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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-and-run driver, or driver of a stolen car – State laws require only minimum liability limits, which are relatively low

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.1 Table of Limits, Financial Responsibility and Compulsory Insurance Laws

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.2 Example of an Automobile Insurance Plan (Generalized)

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved 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

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.3 Top Five Most Expensive and Least Expensive Cities for Automobile Insurance, 2006*

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.4 Accidents by Age of Drivers, 2004

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.5 Motor Vehicle Deaths per 100,000 Persons by Age, 2004

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.6 Casualty Actuarial Society Credit Study, Personal Automobile Loss Ratio by Category

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.7 New Texas Study Shows People with Good Credit Involved in Far Fewer Accidents Personal Automobile Insurer Group B, Claim Frequency vs. Credit Score

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.8 Tips for Buying Auto Insurance

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.9 Auto Insurance Premiums for Omaha, Nebraska (Six-Month Premiums) (con’t)

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.9 Auto Insurance Premiums for Omaha, Nebraska (Six-Month Premiums) (con’t)

Copyright © 2008 Pearson Addison-Wesley. All rights reserved Exhibit 23.9 Auto Insurance Premiums for Omaha, Nebraska (Six-Month Premiums)