CH 23

Copyright 2008 Pearson Addison-Wesley. All rights reserved.
Chapter 23
Auto Insurance
and Society
23-2
Agenda
Approaches for Compensating Auto
Accident Victims
Auto Insurance for High Risk Drivers
Cost of Auto Insurance
Shopping for Auto Insurance

23-3
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

23-4
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
23-5
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

23-6
Exhibit 23.1 Table of Limits, Financial
Responsibility and Compulsory Insurance
Laws
23-7
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
23-8
Many states require uninsured motorists coverage
The injured persons 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
23-9
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

23-10
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
23-11
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

23-12
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 states no-fault law and pay lower
premiums
Or, they can retain the right to sue under the tort liability system
and pay higher premiums

23-13
No-fault benefits are provided by adding an endorsement
to an auto insurance policy
Benefits are restricted to the injured persons 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
23-14
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

23-15
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
23-16
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
23-17
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
23-18
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
23-19
Exhibit 23.2 Example of an Automobile
Insurance Plan (Generalized)
23-20
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
23-21
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

23-22
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 applicants credit record

23-23
Exhibit 23.3 Top Five Most Expensive
and Least Expensive Cities for
Automobile Insurance, 2006*
23-24
Exhibit 23.4 Accidents by Age of
Drivers, 2004
23-25
Exhibit 23.5 Motor Vehicle Deaths
per 100,000 Persons by Age, 2004
23-26
Exhibit 23.6 Casualty Actuarial Society
Credit Study, Personal Automobile Loss
Ratio by Category
23-27
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
23-28
Exhibit 23.8 Tips for Buying Auto
Insurance
23-29
Exhibit 23.9 Auto Insurance Premiums
for Omaha, Nebraska (Six-Month
Premiums) (cont)
23-30
Premiums) (cont)
23-31
Premiums)

CH 23

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