New Choices in Auto Insurance

The high cost of auto insurance is a serious concern for many people across the country. Annual premiums can run into thousands of dollars. Low income drivers are hit particularly hard, spending as much as 15 to 30 percent of their discretionary income on auto insurance premiums. It's no wonder there are millions of uninsured drivers nationwide.

Personal injury litigation fuels much of the cost. In many states, the right to sue is virtually unlimited, not just for economic damages (medical expenses, lost wages, and vehicle repairs), but for pain and suffering as well. According to a Rand Institute study, the cost of bodily injury premiums increased 150 percent in the 1980s, while the overall number of accidents declined. The profusion of personal injury lawsuits and lucrative jury awards have encouraged inflated and even fraudulent claims, driven up costs, and made the task of insuring a car difficult, if not impossible, for many drivers.

The characteristic response to this problem has been to call for no-fault auto insurance. Under no-fault, each driver insures against his personal risk. When an accident occurs, the insurers reimburse their respective policyholders, regardless of who was at fault. Ostensibly, this does away with the need to determine fault and thereby precludes sending the dispute to the courts. Because the consumer need only purchase insurance for his own protection, no-fault insurance should be considerably less expensive.

But no-fault insurance has its own problems. Many people are not comfortable with the idea of doing away with fault. If a person is injured due to someone else's negligence, shouldn't the injured party have the right to seek some sort of compensation for that wrong?

With this concern in mind, states tried to design their no-fault plans to allow injured parties limited access to the courts. For example, some states allow an injured party to bring suit if their damages exceed a certain monetary threshold. However, as cost control measures, monetary thresholds backfired. Instead of limiting lawsuits and overall costs, they created incentives to inflate damage and injury claims to ensure an injured party's ability to sue.

The soon-to-be-introduced Auto Choice Reform Act provides a better approach to no-fault reform. The bill, sponsored by Sens. Mitch McConnell (R-KY), Daniel Moynihan (D-NY) and Joseph Lieberman (D-CT), would preempt state laws in order to give consumers the opportunity to choose between traditional coverage based on tort liability and no-fault coverage. If a consumer chooses tort liability coverage, he retains the right to sue for damages for pain and suffering in the event of an accident. A consumer who chose the no-fault coverage (called “personal protection insurance” in the legislation) would surrender his right to sue for such damages in exchange for a lower premium.

This approach has many benefits. For starters, it would make the cost-savings advantage of no-fault available to consumers, while avoiding a one-size-fits-all requirement that all consumers purchase no-fault coverage. The consumer would still have the more expensive option of retaining the right to sue for personal injury. No-fault and tort liability coverages would compete in the marketplace, with the consumer deciding which offers the better value. Market forces, economic incentives and contract – not legislative fiat – would work to limit the number and cost of lawsuits in the auto insurance system.

Personal protection insurance would provide significant savings to the consumer. The Joint Economic Committee estimates that the auto choice no-fault option could provide, on average, a 30 percent reduction in annual premiums. This would mean an average annual savings of $221 per household, and up to $40 billion in savings nationwide.

The proposed legislation would not do away with fault altogether. There would be exceptions, but unlike many states, the bill would institute a “verbal threshold” for lawsuits rather than a monetary one. This provision bases the right to file suit on certain specified contingencies, not the amount of money at stake. It would allow those who choose personal protection coverage to bring suit for economic loss if they have been harmed by a drunk driver, by a deliberate act, or if their injuries exceed the total amount of coverage provided by their personal protection policies. By restricting litigation to more objective circumstances, this legislation stands a much greater chance of achieving genuine cost control.

The Auto Choice Reform Act provides a contractual means to reduce the level of litigation in the auto insurance system, limit incentives for fraudulent or exaggerated claims, and ultimately deliver significant savings.

Jeffrey R. Yousey is a research associate with CEI's Insurance Reform Project.