Principles of risk management and insurance 10th by george rejda chapter 23

233 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 numbe

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Chapter 23

Auto Insurance

and Society

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• Auto Insurance for High Risk Drivers

• Cost of Auto Insurance

• Shopping for Auto Insurance

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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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• 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

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• 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 Table of Limits, Financial

Responsibility and Compulsory Insurance

Laws

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• 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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• 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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• 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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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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• 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

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– 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 benefits are provided by adding an endorsement

to an auto insurance policy

– Benefits are restricted to the injured person’s economic loss, which includes:

– In some states, insurers must also offer optional no-fault benefits

above the prescribed minimums

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• 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

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• 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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• 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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• 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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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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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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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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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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Exhibit 23.3 Top Five Most Expensive

and Least Expensive Cities for

Automobile Insurance, 2006*

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Exhibit 23.4 Accidents by Age of

Drivers, 2004

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Exhibit 23.5 Motor Vehicle Deaths

per 100,000 Persons by Age, 2004

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Exhibit 23.6 Casualty Actuarial Society

Credit Study, Personal Automobile Loss

Ratio by Category

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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

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Exhibit 23.8 Tips for Buying Auto

Insurance

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Exhibit 23.9 Auto Insurance Premiums

for Omaha, Nebraska (Six-Month

Premiums) (con’t)

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Premiums) (con’t)

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Premiums)

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