risk and insurance chapter 21

Approaches for Compensating Auto Accident Victims

• How drivers can show they can pay for accidents (financial responsibility):

  • Have an auto liability insurance policy with at least the minimum required coverage

    • Example: If your state requires $25,000 for injury per person, your policy must cover at least that.

  • Post a bond

    • Example: A court-approved payment guarantee instead of insurance.

  • Deposit the required amount of money with the state

    • Example: Putting $50,000 in a state account to cover potential accidents.

  • Be a qualified self-insurer

    • Example: Some large companies or government entities can prove they can pay for accidents themselves.

• Limitations of financial responsibility laws:

  • They don’t guarantee full protection against irresponsible drivers.

  • Accident victims may not get paid if:

    • Driver is uninsured

    • Driver commits a hit-and-run

    • Driver was driving a stolen car

  • State laws usually require only minimum liability limits, which are often low compared to real accident costs

Compulsory Auto Insurance Laws

• Compulsory insurance law:

  • Requires drivers to carry at least minimum liability insurance before their vehicle can be licensed or registered.

  • Example: You cannot legally register your car without proof of $25,000 bodily injury coverage per person if that’s the state minimum.

• Advantages:

  • Provides greater protection against uninsured drivers because proof of insurance is required before an accident happens.

• Criticisms / Limitations:

  • Mandatory insurance does not necessarily reduce uninsured drivers.

    • Example: Some people may still drive without insurance despite the law.

  • No correlation between compulsory insurance laws and the number of uninsured vehicles on the road.

  • Computer reporting systems meant to track uninsured drivers have not been very effective.

Compulsory Insurance Law

A law that requires drivers

Unsatisfied Judgement Funds

A state fund that pays accident victims when they have a court judgement against a negligent driver, but cannot collect from that driver

• What they are:

  • Special state funds in 5 states (MD, MI, NJ, NY, ND) that pay accident victims when all other recovery options fail.

  • Example: If you win a court judgment but the at-fault driver can’t pay, this fund can step in.

• Requirements to access the fund:

  • Victim must have a judgment against the negligent driver.

  • Must prove the judgment cannot be collected from the driver.

• Limitations:

  • The amount paid is limited by state law.

  • Payments may be reduced by other collateral sources (like insurance or settlements).

• Obligations and financing:

  • The negligent driver must repay the fund if possible.

  • States fund the program in different ways, such as assessments on insurers.

Uninsured Motorists Coverage

Insurance that pays for your injuries (and sometimes property damage) if you’re in an accident caused by an uninsured, hit-and-run, or insolvent driver

• What it is:

  • Many states require uninsured motorist (UM) coverage as part of auto insurance.

  • Example: If someone without insurance hits you, your own insurer can pay for your injuries.

• What it covers:

  • Bodily injury caused by:

    • An uninsured driver

    • A hit-and-run driver

    • A negligent driver whose insurance is insolvent

  • Some states also cover property damage.

• Advantages:

  • Faster claim settlement than filing a tort liability lawsuit.

• Limitations:

  • The injured person must prove the uninsured motorist is legally liable.

  • Minimum coverage limits are low, so victims may not be fully compensated.

Low-Cost Auto Insurance

Affordable auto insurance that provides the minimum required liability coverage for drivers who cannot pay for regular insurance

• What it is:

  • Provides minimum liability insurance at reduced rates for drivers who cannot afford regular insurance.

  • Example: A low-income driver may pay $200/year instead of $800/year for basic coverage.

• Goal:

  • Reduce the number of uninsured drivers on the road.

• Effectiveness:

  • A pilot program in California hasn’t been very effective.

    • Many drivers still find insurance too expensive.

• Related laws:

  • Some states have “no pay, no play” laws, which prevent uninsured drivers from suing negligent drivers for noneconomic damages (like pain and suffering).

“No Pay, No Play” Laws

Laws that prevent uninsured drivers from suing negligent drivers for noneconomic damages like pain and suffering

No-Fault Auto Insurance

A system where each driver collects compensation from their own insurance company for their injuries after an accident, regardless of who caused it

• What it is:

  • A system where each driver collects from their own insurer after an accident, regardless of who caused it.

  • Example: If you’re hit by another car, your own insurance pays for your injuries without waiting to prove the other driver was at fault.

• Prevalence:

  • About half of the U.S. states have no-fault auto insurance laws.

• Reason it exists:

  • Created due to dissatisfaction with the traditional tort liability system (lawsuits were slow, costly, and complicated).

  • Encourages trusting your own insurance company rather than the other driver’s insurer.

No-Fault Auto Insurance Laws

State laws that require drivers to carry no-fault insurance, allowing them to receive compensation from their own insurer without proving the other driver was at fault

Variations of No-Fault Auto Insurance

No-fault plans differ by state:

• Pure no-fault plan:

  • Accident victims cannot sue at all, no matter how large the claim.

  • Note: No states have a pure no-fault plan.

• Modified no-fault plan:

  • Victims have a limited right to sue.

  • Can sue if:

    • Monetary threshold is exceeded (injury claim is above a certain dollar amount).

    • Verbal/serious injury threshold is met (e.g., death, dismemberment, disfigurement, or permanent loss of bodily function).

  • Example: In a modified plan state, you might only be able to sue if your medical bills exceed $50,000 or if you suffer permanent disability.

Pure No-Fault Plan

A no-fault auto insurance system where accident victims cannot sue the at-fault driver under any circumstances

Modified No-Fault Plan

A no-fault auto insurance system where accident victims can sue the at-fault driver only if certain monetary or serious injury thresholds are exceeded

Monetary Threshold

A specific dollar amount of bodily injury costs that must be exceeded before a victim can sue under a modified no-fault plan

Verbal Threshold

A type of injury requirement (like death, dismemberment, disfigurement, or permanent loss of function) that must be met before a victim can sue under a modified no-fault plan

Add-On and Choice No-Fault Plans

• Add-On Plan:

  • Pays benefits to an accident victim regardless of fault.

  • Victim still has the right to sue the negligent driver.

  • Note: Not a true no-fault plan.

  • Example: If someone hits you, your insurance pays, and you can also sue the other driver for additional damages.

• Choice No-Fault Plan:

  • Motorists can choose between two options:

    1. Be covered under the state’s no-fault law and pay lower premiums.

    2. Retain the right to sue under tort liability and pay higher premiums.

  • Example: A driver might opt for lower premiums and no lawsuits, or higher premiums to keep full legal rights.

Add-On Plan

An insurance plan that pays benefits regardless of fault while still allowing the victim to sue the negligent driver

Choice No-Fault Plan

A plan that lets drivers choose between no-fault coverage with lower premiums or retaining the right to sue under tort liability with higher premiums

What No-Fault Insurance Covers

• No-fault benefits are added to your policy through a special endorsement.

• These benefits only cover economic losses (financial losses), not pain and suffering.

• Economic losses covered include:

  • Medical bills

  • Lost wages

  • Essential services (help with housework or daily tasks you can’t do)

  • Funeral costs

  • Survivors’ benefits (regular payments to a spouse or dependent children if the insured dies)

• Some states require insurers to offer optional extra no-fault benefits above the minimum required amounts.

Optional No-Fault Benefits

Extra no-fault coverage you can buy above the minimum required

Right to Sue and Property Damage in No-Fault Plans

• Right to sue:

  • Varies by state and type of plan (no-fault or add-on).

  • All states allow a lawsuit if the injury is serious.

• Property damage:

  • No-fault laws usually cover only bodily injury, not property damage.

  • Exception: Michigan covers property damage under no-fault.

  • Motorists can sue the negligent driver for property damage.

  • These cases are generally small and resolved quickly.

Arguments in Support of No-Fault Auto Insurance

Reasons supporting no-fault laws:

• Difficulty in determining fault

  • It can be hard to decide which driver caused the accident.

• Inequity in claim payments

  • Serious claims may be underpaid under traditional tort systems.

• High transaction costs and attorney fees

  • Less than half of tort dollars actually reach injured victims.

• Fraudulent and inflated claims

  • Pain and suffering awards are sometimes based on medical expenses and wage loss, giving claimants incentives to inflate claims.

• Delay in payments

  • Claims take a long time due to investigation, negotiation, and court delays.

Arguments Against No-Fault Auto Insurance

Reasons against no-fault laws:

• Defects of the current system are exaggerated

  • Problems in the tort system may not be as widespread as claimed.

• Savings from no-fault are exaggerated

  • No-fault may not actually save as much money as proponents suggest.

• Court delays are localized

  • Long delays mainly occur in a few large cities, not everywhere.

• Safe drivers may be penalized

  • Rating systems can raise premiums for drivers who were not at fault.

• No payment for pain and suffering

  • Victims may not be compensated for emotional or non-economic losses.

• Tort system improvement preferred

  • The existing tort liability system could be reformed rather than replaced.

Effects and Repeal of No-Fault Laws

• Repeal of no-fault laws:

  • Some states repealed their no-fault laws because low monetary thresholds increased lawsuits.

• Findings from the Institute for Civil Justice:

  • Reduce attorney fees and claim processing costs.

  • Match compensation more closely with actual economic loss.

  • Generally pay benefits more quickly.

• Conclusion:

  • Savings from no-fault plans depend on the specific provisions included in the plan.

Auto Insurance for High-Risk Drivers

• High-risk drivers:

  • Drivers who have trouble getting insurance in the voluntary market.

  • Typically include:

    • Younger drivers

    • Drivers with poor driving records

    • Drivers convicted of drunk driving

• Shared (residual) market / Assigned risk plan:

  • Most states have a plan that makes insurance available to high-risk drivers.

  • All insurers in the state take a share of high-risk drivers based on their total premiums written.

• Premiums:

  • Substantially higher than those in the voluntary insurance market.

Shared (Residual) Market

A system that provides auto insurance to high-risk drivers who cannot get coverage in the regular market

Auto Insurance Plan (Assigned Risk Plan)

A state program that assigns high-risk drivers to insurers so they can obtain required auto insurance, usually at higher premiums

Joint Underwriting Association (JUA) for High-Risk Drivers

Joint Underwriting Association (JUA):

• Some states have a common pool where all insurers participate to provide coverage to high-risk drivers.

• Each insurer pays a proportionate share of pool losses and expenses.

• The JUA designs policies and sets rates for the pool.

• Underwriting losses are shared by insurers based on the premiums they write in the state.

• Only a limited number of insurers act as servicing insurers, but all insurers participate in the pool.

Joint Underwriting Association (JUA)

A state-established program in which all auto insurers in the state share responsibility for providing coverage to high-risk drivers through a common pool

Reinsurance Facilities and Specialty Insurers for High-Risk Drivers

• Reinsurance facility / pool:

  • Some states have a pool for high-risk drivers.

  • Insurers must accept all applicants.

  • If a driver is high-risk, the insurer can place them in the reinsurance pool.

  • Underwriting losses are shared by all auto insurers in the state.

• State example:

  • Maryland Automobile Insurance Fund provides coverage to high-risk drivers canceled or refused by private insurers.

• Specialty insurers:

  • Companies that focus on insuring drivers with poor driving records.

Reinsurance Facility (or Pool)

A state-established program where all insurers share the responsibility for providing coverage to high-risk drivers

Maryland Automobile Insurance Fund

A state fund that provides auto insurance to high-risk drivers who have been canceled or refused by private insurers

Specialty Insurers

Insurance companies that focus on providing coverage to drivers with poor driving records

Factors Affecting Auto Insurance Costs

• Reasons auto insurance rates have increased:

  • Rising medical costs and higher vehicle repair costs

  • Soaring jury awards in liability cases

  • Insurance fraud and abuse

• Factors insurers use to set premiums:

  • Territory / location

  • Age, gender, marital status

  • Use of the auto (personal vs. business)

  • Driver education

  • Number and types of cars

• Discounts and reductions:

  • Multicar discount for owning 2+ cars

  • Good student discount

  • Safe driver plans for clean driving records

  • Insurance score based on credit record

Multicar Discount

A premium reduction offered when a policyholder insures two or more vehicles with the same insurer

Insurance Score

A number derived from an applicant’s credit record used by insurers to help determine auto insurance premiums