The high price of auto insurance.
Most taxpayers know only two things about auto insurance: Forty-four states say they have to have it, and it costs too much.
Americans paid an estimated $142 billion for auto insurance in 1997. The average policy cost $757 in 1995, and a study by Consumer Reports showed that the average cost to insure a vehicle rose 44 percent between 1987 and 1994, nearly one and a half times the rate of inflation.
Massachusetts was the first state to require drivers to carry auto liability insurance, in 1927. Today, all states have financial responsibility laws that require drivers to show proof of their ability to pay after an accident, and 44 say you must have insurance if you drive.
Over the years, the states that require insurance have come up with a number of plans they hope will be more equitable for insured drivers, accident victims and insurance companies. Unfortunately, auto insurance has come to be viewed as a no-win predicament: Drivers don't want to pay high premiums, victims want compensation commensurate with injuries, insurance companies combatively protect the bottom line, and lawyers are involved in all aspects of the dilemma.
Why are the costs so high?
Many continue to point their fingers at lawyers. A 1990 study by the California Department of Insurance states that 40 cents of every premium dollar paid for bodily injury liability and uninsured motorist coverage goes to attorneys. It's a vicious cycle: Accident victims pay for legal representation and insurance carriers hire their own lawyers.
Not so fast, says a spokesman for the Association of Trial Lawyers of America (ATLA). "Many of your state legislators know the truth is basically that insurance companies and regulators are the problem." He added that insurance companies made more than $18 billion just on auto insurance last year.
ALLEVIATING THE FAULT?
So, if there were fewer lawsuits, rates would go down. Correct?
Fifteen states worked out legislation along those lines and created no-fault insurance. If a driver is in an accident, her insurance company pays her bills. No fuss, no muss, no having to hire a lawyer and prove who was at fault to determine who pays what.
However, trying to pass legislation opposed by the strength of the trial lawyers association led to compromises - after a certain point depending on the specific state statute, people can still file lawsuits against the "at-fault" driver. No-fault was essentially defeated by the leeway given for lawsuits.
The plan seems to be working best in Michigan. Bob Hunter of the Consumer Federation of America points to Michigan no-fault as the best approach to auto insurance.
"Michigan is simple, straightforward no-fault," he explains. "For giving up your right to sue, you have unlimited medical care and rehabilitation services. It's the only state in the union where seriously hurt people are taken care of, and has the richest benefits for below average costs."
Hunter said that Michigan realized huge savings by taking away the right of accident victims to sue, except in extreme cases of death, permanent disfigurement or permanent injury.
The state was also one of the first to pass "no pay, no play," which prohibits uninsured drivers from bringing lawsuits for noneconomic damages such as pain and suffering in even the most extreme cases.
The ATLA spokesman, however, points out that most no-fault states have some of the highest insurance rates in the nation. This is true of Hawaii, Massachusetts, New Jersey, New York and Connecticut, which repealed its no-fault insurance last year. However, Kansas also is a no-fault state and ranks eighth lowest in the nation.
North Carolina has some of the lowest premiums in the nation at an average of $500.
"I do think, to some extent, that's because of people's driving habits, our road conditions and our attitudes about suing and filing claims," says Representative Robert Brawley, a life insurance agent who has served on the House insurance committee for 16 years.
Brawley also notes that the state insurance commissioner is elected and "his campaign strategy is always low rates."
"And we have something called contributory negligence," he adds. "The trial lawyers hate it with a passion. It's just the opposite of no-fault. The thinking is that if you contribute to an accident, you don't deserve anything from it.
"The real difference is who's going to be held liable for an accident. No-fault points to nobody and says everybody is entitled to receive something. Contributory negligence points to everybody and says if you participated in creating the accident, you're not entitled to anything. It sure makes a difference in an attorney's attitude when you ask them to take your claim, and it keeps our litigation costs down."
Under contributory negligence, which is a variation of tort law, "If I'm in an accident and I hire an attorney to sue and collect from the other person and it's determined that I contributed to that accident, I don't collect nor does my attorney. In no-fault, both parties collect as well as their attorneys," Brawley explains.
Under North Carolina law, a percentage of "fault" is determined after an accident, and awards to victims are based on those numbers.
WHAT ELSE ARE STATES DOING?
Insurance rates for most drivers in Hawaii, which has the second most expensive insurance average of $963.08, dropped 20 percent when new legislation went into effect Jan. 1.
The law passed by the Legislature last session reduces mandatory medical coverage from $20,000 to $10,000, discourages minor lawsuits through a $5,000 deductible for court awards and shifts some of the medical costs to health insurance policies. Wage loss coverage and death benefits have become optional.
Meanwhile, other compulsory insurance states continue to grapple with the problem. "We all want to be assured that drivers can pay for the damages they cause," notes Senator Ray Powers of Colorado, a no-fault state.
Legislators there were told last summer that compulsory insurance plus high rates had resulted in a proliferation of uninsured drivers. Estimates by the Insurance Information Institute put the number of uninsured Colorado drivers at about 10 percent in 1997 - although exact figures are almost impossible to determine. Nationwide, the Insurance Research Council has reported the number as high as 50 percent of all drivers in some states and has estimated that 17 percent of all households have one or more uninsured vehicles.
Powers served on an interim committee last year that tried to figure out the best ways to reduce insurance premiums for the average car owner. As a result of the committee meetings, a package of legislation is wending its way through the General Assembly to decrease the cost of insurance in a state ranked 16th in the nation for high premiums.
The average Coloradan paid $721.93 a year to insure one car - a 23 percent increase over the cost four years earlier. The interim committee was told that those skyrocketing costs led many drivers to drop their insurance, driving up costs for the insured who are required to carry coverage against uninsured drivers.
One of the major components of the Colorado plan is a proposal to lower the required coverage for personal injury from $50,000 to $5,000; rehabilitation from $50,000 to $5,000; and disability income from $400 a week to $5,000 total. That proposal was unanimously approved by the House Transportation Committee in January.
Though $5,000 may not go far for accident victims, Representative Barry Arrington noted that there was nothing to stop people from purchasing additional coverage.
ENTER THE FEDS
Now the federal government has gotten into the act with the Auto Choice Reform Act being considered by Congress.
Under the choice plan, drivers could choose personal protection insurance (PPI) instead of traditional bodily injury coverage - the part of the policy that pays medical costs, loss of earnings, and pain and suffering. With PPI, the other driver would pay for economic losses up to a coverage limit, directly from his own insurance company. In return, he would waive the chance to sue for pain and suffering. PPI holders would be immune from similar claims by other motorists.
"There are two main problems with insurance," explains Jeffrey O'Connell, professor of law at the University of Virginia Law School who helped devise the choice plan. "It is difficult to determine who is at fault. Attorneys can argue about it, while the meters tick away on both sides. Then they try to determine and pay for the value of pain and suffering.
"The answer is to eliminate those two variables, to no longer pay based on fault and to pay only medical expenses and wage loss."
Not fair, says the trial lawyers' association spokesman. Choice is basically no-fault in another guise. It usurps state authority and is an attempt to federalize a state prerogative. He adds that insurance rates will go down with stricter regulation of insurance companies, greater safety of vehicles and roads, limiting profits of insurance companies and demanding rollbacks if profits exceed certain levels. Strong efforts to fight insurance fraud as well as elected commissioners of insurance are other factors, he said.
North Carolina's Brawley also is strongly opposed and sees the federal proposal as expropriating states' rights. "The worst thing that could happen is for the federal government to get into our insurance laws. Insurance is a business, it's not a social program."
And as a consumer advocate, Hunter also sides against the plan. "Choice is really no-fault, and I consider it almost fraudulent. It misleads people into thinking they've retained the right to sue. If they want to go for no-fault, why don't they just bite the bullet and go for a Michigan-type system?"
Why the federal interest? "I think they believe that reform efforts have been stymied at the state level," says David Snyder, assistant general counsel for the American Insurance Association, "by special interests - and frankly, I'm one of them. I think the other special interest is trial lawyers. The ability to stop or move legislation is a trial bar strength.
"And unless there is reform within the states, the feds are going to continue to show interest and may intervene," he predicts.
As the proposal now stands, state legislatures or insurance commissioners could opt out of the federal plan if it passes. Washington watchers say that the federal formula to lower insurance is supported by the larger insurance companies, but is likely to be opposed by an unusual alliance of smaller insurance firms and trial lawyers.
RELATED ARTICLE: WHY IS IT MORE IN NEW JERSEY THAN NEBRASKA?
The question of insurance rates seems fairly simple on the surface. Average rates in 1996 were highest in New Jersey ($1,013.74), Hawaii ($963.08), the District of Columbia ($958.58), New York ($905.90) and Massachusetts ($898.21); and lowest in South Dakota ($429.64), iowa ($428.67), Wyoming ($432.89), Idaho ($446,81) and Nebraska ($451.87).
But what makes the difference between New Jersey and Nebraska?
Answers to four primary quest ons, according to David Snyder, assistant general counsel for the American Insurance Association in Washington, D.C.
* What is the driving environment? There are more cars and more motorists driving faster in New Jersey than across the wide open, rolling, more sparsely populated plains of Nebraska. Hence, more accidents, more injuries, higher costs. "Some environmental factors are not going to change," Snyder says. "New York City with its traffic density will always remain in New York state, affecting the rates paid by all New Yorkers." The driving environment can be changed by tough laws on highway safety, drunk driving and insurance fraud, and stringent enforcement.
* What kind of insurance is there in the state? Tort? No-fault? Choice? Snyder calls comparisons of the various systems one of the more difficult analyses. Proponents of no-fault, for example, will show how it lowers average premiums while opponents cite other statistics to show that it doesn't work. "Both sides are guilty of cherry picking statistics," Snyder says. He adds the one organization he considers to have provided reliable information is the Rand Institute for Civil Justice because "there are trial lawyers and insurance representatives on the board." The best information, he says, is "statistics that tell a state what to expect with a particular compensation system."
* What are the mandatory levels of benefits? In tort states, the range can be everything from a required $10,000 per person to $100,000. "This affects the price of an insurance package and has a disproportionate impact on low-income people," Snyder points out. He adds that no-fault "removes a lot of overhead for insurance companies and victims," but high liability mandates put insurance beyond the reach of the poor. In fact, New Jersey has the second highest level of benefits in the nation at $250,000. Only Michigan, with unlimited benefits, tops the Garden State.
* How competitive is the system? Are insurance companies competing for customers? "Do regulations protect consumers but still give companies leeway to compete, to pursue new avenues, move and adapt to market conditions?" Snyder asks. What sounds good as public policy, he warns, may have unintended effects on the market and companies' ability to operate, forcing premium prices up.
Dianna Gordon is an assistant editor of State Legislatures.
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|Title Annotation:||automobile insurance|
|Date:||Mar 1, 1998|
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