Liability Insurance
Chapter 3
Automobile Liability
Almost no one would object to the fact that everyone needs automobile insurance if they drive or even own an automobile. The cost of owning such insurance can be very expensive. There are two types of automobile liability insurance: fault and no-fault. These aspects will be covered in this chapter, some in greater detail than others.
Is there really a need?
Automobile liability insurance protection is one of the most widely held coverages purchased by both individuals and businesses. Many states require all drivers to purchase it.
It would be inaccurate to describe this type of insurance as tort liability automobile insurance. "Tort" implies fault, so tort insurance would be fault insurance. Nor would it be accurate to describe this type of insurance as no-fault insurance which is not based on negligence. And as anyone who drives knows, there are negligent drivers on the roads. Thus, the best description would be a compromise: fault and no-fault automobile liability insurance. Simply stated: it says that the solutions for the future will contain both systems of automobile insurance. It is expected that the complex changes will adjust to a combination of both concepts.
As we look around us today, we see that just about everyone in a family owns some type of automobile. A wife has hers, the husband his and if the kids are old enough to drive, they normally have theirs. Even after couples retire, they normally still keep their automobiles. They may even move up to an RV. All these people need auto liability coverage.
With so many people driving to and from work or school, we see the awesome effects in terms of death, injuries and monetary costs. Annual tolls of such events have reached alarming rates. In 1983 there were about 50,000 persons killed, 5 million persons injured in 28 million accidents, and $60 billion (yes billion) in lost wages, property damages, and legal, medical and insurance costs.
These statistics bring us back to the fact that automobile drivers/owners need insurance protection. Because of this need, it is no wonder that the insurance industry has grown in leaps and bounds, exceeding well over $50 billion in annual premiums. More than 60 percent of the premiums are for liability and related insurance. The remainder amount is for physical damage coverage on the automobile of the insured.
There are three viewpoints that are pertinent for appraising the need for automobile liability insurance. They are:
1. the society,
2. the automobile motorist, and
3. the injured victims of the automobile accidents.
Automobile liability insurance protection must be regarded as not only an individual solution to an individual problem of risk, but also in its social or public aspects. We could probably all agree that anyone owning or using an automobile should have liability insurance protection. The uncertainty of financial disaster due to an automobile accident is an outstanding risk today that few individuals are exempt from.
Statistically speaking, 9 out of 10 accidents involve individual negligence, such as failure to obey traffic laws, driving while under the influence of alcohol or drugs as well as the persons out there that is looking at the scenery rather than the road. Some accidents may involve factors that make it difficult to assign blame to one individual and can be categorized as social negligence. For instance, could the cause of the accident be partially to blame for poor lighting, the lack of adequate roads, improperly engineered highway grades, curves and traffic signals, etc.? So the obvious cause of the accident may be the person behind the wheel, but others factors, like the ones mentioned above, may also lend to the cause of the accident.
Individuals as well as families may suffer a death or disability loss due to medical care expenses and lost income as a result of an automobile accident. In many accident cases, these individuals or families may have a hard time covering these lost income expenses. The medical expenses are normally covered adequately. The greatest loss comes from short term losses of income because the insurance companies are not as quick to come up with the loss of income the family experiences. Another circumstance that can cause a major inconvenience to a family is when the policy limits of the responsible person's insurance policy is met. This means that any exceeding amounts due for medical may not be included and must be covered by the family's automobile coverage or even their own medical coverage. The family can opt to sue the responsible party for the additional expenses, but if the responsible party does not have anything of value to receive as payment, it is a loss on the family's part for the legal expenses.
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An individual faces risks which requires protection from all the important fields of insurance: 1. Liability 2. Property, 3. Life, and 4. Health, which may include disability. |
On this note, there is another viewpoint that may be overlooked; that of the victims. If the victims are innocent unpaid automobile accident victims, certain legal rights accrue to them against the responsible parties involved for their property damage or personal injury loss. This is known as uninsured motorist, but the result rather than the cause of the problem appears to be a better way of stating the difficulty. For the victims to obtain payment, they must prove that the other party was liable. For the victims to do this they may need to hire an attorney, and maybe even take time off from work to handle the necessary legal proceedings which can add up very quickly. Even after all this effort, the negligent parties may not be able to pay for the results of their actions. So as stated in the box above, Individuals face risks that require protection from all the important fields of insurance: liability, property, life and health, which may include the need for additional disability coverage. If the responsible party cannot pay for their actions, the innocent victims of an automobile accident may remain uncompensated.
If the family or the victim may become burdens of the state/federal through various welfare or social insurance programs, the costs become high for everyone. The victim's property is damaged, one of both parties involved may be injured, and income could be lost. Because of this growing problem, government has stepped in with studies and laws relating to accident causes, repair costs, auto safety features and auto insurance costs and market inadequacies.
There is no question that the automobile is needed vital to our lives. There is also not question that the automobile driver is the cause of many financial and physical losses. As a result, insurance is necessary and, in some states, mandatory. Automobile insurance premiums are related to another major aspect of this problem - determining how the costs to the injured victim can be met through the insurance company and government action.
The Increasing Insurance Premiums
Automobile insurance may be one of the most important costs in operating an automobile. A car owner is faced with depreciation, maintenance, gas, insurance and tax expenses. Some policyowners will pay more for their automobile insurance than they will for gas or maintenance. A few years ago this may have shocked some. Now it is not surprising to find that the annual cost of a young driver's insurance premiums may exceed the value of the car they are driving.
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The basic reason that automobile insurance increases is traceable to the loss portion of the premium dollar paid for automobile insurance. |
The basic reason that automobile insurance increases, sometimes doubling in the last ten years, is traceable to the loss portion of the premium dollar paid for automobile insurance.
Policyholders probably do not analyze the losses paid out by their automobile insurance companies for bodily injury liability. The reasons for much greater premiums might be highlighted if they did. In analyzing these factors, we can see the reasons for the increases in premium costs:
1. More automobiles, more drivers, more mileage driven, thus more accidents,
2. Sharply rising hospital and medical costs for treating accident victims,
3. More loss income, which is based on rising wages when injuries do occur, and
4. A sharp upward trend in size and number of claims made, the settlements paid, and the verdicts granted by juries in personal injury cases.
What about property damage liability, collision and physical damage premium costs? We could again analyze another set of factors:
1. higher property values. This includes cars as well as the property which automobiles damaged, and
2. higher repair costs (especially for automobile repairs) based on increased labor and material costs, which does not include the increased costs if the car is a foreign model.
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Another huge factor to the rising insurance premiums is the increased payments under automobile insurance contracts from fraud or exaggerated claims. |
When investing for retirement, inflation is the number one risk for those savings. Inflation is also an underlying factor in many of the reasons for the rising automobile premiums. The prices of items important to insurance have increased drastically. Policyowners are quick to blame these increases on the insurance companies themselves. What they do not see is that the insurance companies do not have any control over a great many things such as inflation itself, as well as hospital and medical costs, repair costs, car design, highway construction, and driver and/or car licensing. Another huge factor to the rising insurance premiums are the increased payments under automobile insurance contracts from fraud or exaggerated claims.
Premium Rates
It is no secret that prices charged for automobile insurance contracts vary, even when identical. Though this is no secret, people in general do not understand why. There are factors that led to the different premiums charged. The following is an examination of a couple of these less highlighted reasons.
1. Premium Competition - There may be a couple of reasons for policyowner’s lack of understanding variations. The first may by that many of the pricing mechanisms for automobile insurance are not simple. These pricing mechanisms include many variations in both regulation and practice. The regulatory provisions of the 50 states differ greatly. These differences appear in sharp focus when one analyzes the numerous automobile insurance markets and the actual practices of the competing insurance companies. The second reason may be that insurance consumers do not take the time to investigate their decisions. These decisions are not always carefully calculated. The consumer's backgrounds vary in education, ability, initiative and interest. Automobile insurance may be purchased on emotional factors and partial information instead of on the basis of rational decisions made with all the facts obtained.
2. Nonpremium Competition - If life and health insurance premiums vary widely, why not automobile premiums also? The insurance contracts do differ in their terms. Even in identical contracts the product is largely a bundle of services and not limited merely to indemnification for loss. The difference in premium rates also includes many hard-to-measure benefits. Other important factors important to people, besides the premium cost itself, are needs such as the:
a) opportunity to learn about their requirements, and how insurance can provide the best solutions,
b) advice and counsel of the insurance company and agents in making the decisions for proper coverage,
c) promptness, efficiency and fairness of the loss payments, and
d) careful protection of the insured's right to own and drive an automobile by meeting the various vehicle regulations of the states.
3. State Regulation - The main issue for state regulation of rates is set with the above observations. Price competition is needed, as opposed to price cooperation in automobile insurance. Legislative constraints extend the necessary amount of public control of price competition. Three major legislative methods of control may be identified:
a) Prior Approval law,
b) File and Use law, and
c) Open Competition law.
A few states used other methods, such as state-made rates (Texas, Massachusetts) or mandatory bureau rates (North Carolina) instead of rate filings by insurance companies. A Prior Approval law, which most states still use, permits rate changes only after the state has approved them. As a result of the McCarran Act, these states have adopted laws modeled after bills approved by the National Association of Insurance Commissioners (NAIC). These are known as all-industry laws because many states adopted them, but this does not mean that all the states did so. The laws apply to many forms of property-liability insurance in addition to automobile insurance. They permit insurance companies to choose among several alternatives:
filing their own rates,
a) Adopting the rate filed by a rating organization, or
b) Using deviated rates based upon their own experience.
These rates must be filed with the state insurance department, and the insurance commissioner must approve them before they are used by the insurance companies. These laws permit competition through independent, bureau and deviated rates and provide for regulated cooperation through the rating bureau approach to rate making. Competition is encouraged but somewhat controlled. The result is, in most states, a reasonable amount of price competition.
The File and Use law is used by just a few states. The law in these states does not mandate approval of the rates by the insurance commissioner. Contracts and rates are filed but can be used by the insurance companies immediately. The commissioner can disapprove the filings later, if such a decision is made. In some of these states, the bureau rates can be mandatory but mostly they are only advisory.
The Open Competition law is used by just a few states also. This law is based on the idea that competition is the best regulator of insurance premiums. These laws provide minimum regulation as long as the general objective of maintaining competition in order to achieve rate adequacy, reasonableness and fair discrimination are followed. The insurance commissioner does not review forms or premium rates. An NAIC model law in the early 1980s recommended an open competition law for adoption by the states. Some professionals can show evidence that insurance costs are as low and stable in open competition states as in other states. The competition approach is encouraged by independent insurance companies that desire more freedom in setting rates, many stock and mutual bureau insurance companies that want to achieve more adequate rate increases, and the desire of state regulators to lessen criticism from the federal government of the inadequacy of state regulation in maintaining price competition in automobile insurance. Increased auto insurance premiums due to inflation and no-fault laws have caused support for greater rate regulation in automobile insurance.
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Reparations are compensation paid by an irresponsible driver to an injured party or to the owner of the damaged property. |
A basic problem of automobile insurance is the provision of an effective and efficient system for compensating accident victims. An effective system is one that guarantees that injured parties are paid amounts legally due to them. An efficient system is one that provides reparations at the lowest cost consistent with social justice. Reparations are compensation paid by an irresponsible driver to an injured party or to the owner of the damaged property. There are different methods that individual states use in an attempt to provide effective and efficient reparation of automobile accident victims. The most important types of automobile insurance legislation and plans apply to all or nearly all automobile owners or drivers. The following list gives a brief scope of these laws and plans. They are further explored separately later in the chapter.
1. Financial Responsibility Laws,
2. Compulsory Liability Laws,
3. Automobile Insurance Plans, also known as Assigned Risk Plans
4. Other Residual Market Mechanisms,
5. Unsatisfied Judgment Funds,
6. Uninsured Motorists Coverage,
7. Automobile No-Fault Laws,
8. Safety and Loss-Prevention Plans
Financial responsibility laws are used in about 20 states. These states only encourage the purchase of liability insurance by means of financial responsibility legislation, but do not require everyone to buy it. These laws are designed to make it impossible for reckless and financially irresponsible motorists to secure a license to drive a car unless there is a guarantee that they are able to pay and will pay within the statutory limits damages for which they become liable.
Early attempts at financial responsibility laws required that once motorists were found liable for an accident, they had to prove their financial responsibility or lose their license to drive. This was called one-bite laws because they required insurance for future accidents, but not for the first one.
Most states have a security-type law in which it requires motorists involved in an accident to provide security immediately to cover any possible judgments for an accident that has already occurred, as well as insurance for future accidents. All but a few statutes require at least minimum bodily injury of $10,000 per person, and $20,000 per occurrence and property damage limits of $5,000. Many states require higher limits, such as 15/30/10 or 25/50/10.
There is no waiting period until the motorist is convicted of a traffic violation or a judgment is awarded for damages. The motorist must be prepared to respond to damages immediately upon the happening of an accident. The laws apply to the accident that has just occurred as well as to the accidents that may occur in the future. This type of law provides a strong incentive to insure, since most motorists comprehend that failure to satisfy the state officials with respect to financial responsibility following an accident will result in the immediate suspension of the driver’s license and registration. Financial responsibility must be evidenced at the time of any accident involving personal injuries.
The primary purpose of financial responsibility laws is to provide encouragement for all motorists to purchase liability insurance, without compelling everyone to do so. Due to this type of incentive, most drivers are insured because they know their driving privileges could be taken away.
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The primary purpose of financial responsibility laws is to provide encouragement for all motorists to purchase liability insurance. |
Compulsory liability laws are used in about 30 states. These laws make the demonstration of financial responsibility precedent to obtaining registration. All automobile owners are required to show proof of an insurance policy before license and plates will be issued. Some states just require the automobile owner to sign a statement that insurance is in effect. In some states, the law may allow the filing of cash, bond, or collateral in amounts equivalent to the required insurance contract limits of liability. Compulsory liability law makes financial responsibility mandatory in order to own and use an automobile.
Supporters of compulsory liability laws contend that these are superior to the typical financial responsibility laws; under which approximately one out of eight registered vehicles remain uninsured in the United States. This is supposed to protect drivers from the uninsured and financially irresponsible drivers when they are liable for damages and unable to pay for their actions.
Those who oppose these compulsory liability laws object to the compulsion forced on all automobile owners, whether or not they are bad drivers. Those opposed contend that this may tend to increase recklessness, thereby actually causing accidents. Insurance companies have little opportunity to select their risks. The loss suits tend to increase extraordinarily and the rates increase faster in states with compulsory insurance laws.
Even in those states that have compulsory insurance laws, not all motorists are insured, nor are all auto accident injuries covered. Many drivers do not do what the law requires.
Automobile Insurance Plans (AIPs) are used in about 45 states. The automobile insurance plans, formerly called assigned risk plans, have been developed to meet the problem of rejected risks. These plans assure almost all persons that insurance is available. Every state has felt it necessary to make insurance available to all who are entitled to it. Since the insurance companies have the right to choose the risks, an applicant may have a hard time finding adequate insurance coverage. The states have made provisions under the automobile insurance plans for sharing the "residual market" of the higher-risk drivers by equitably distributing individually rejected risks among all the insurance companies.
Automobile insurance plans are not the same in all states, but they work generally the same way. If a motorist has been denied insurance by one or more insurance companies, they may apply to the manager of the assigned risk plan. If the applicant is found to be eligible for insurance according to the standards of the plan, the plan manager assigns the risk to an insurance company. Assigned risks are rotated among different insurance companies in proportion to the business that each insurance company writes in that particular state. All insurance companies are obligated to accept risks as assigned with few exceptions. These exceptions may include applicants who are engaged in gambling, dealing in narcotics or any other illegal enterprises, and habitual violators of the law. Insurance companies covered as assigned risks include not only the person with poor accident records but also the hard-to-underwrite classes of drivers such as the very old, inexperienced, or very young drivers in some areas. Less than one or two percent of applicants are denied coverage under the assigned risk plans.
Drivers who purchase their insurance protection through the automobile insurance plans usually pay a higher rate than other insureds. A surcharge of 10 percent to as high as 200 percent is often applied depending on the driver's accident record, motor vehicle violations, and other factors. Many of the automobile insurance plans offer higher than basic liability limits and other automobile insurance coverages.
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Residual Market Mechanisms attempt to solve uninsured bad driver problems by using other methods to pool the loss experience of high-risk drivers. |
Residual Market Mechanisms are used in about ten states. This residual market plan attempts to solve uninsured bad driver problems by using other methods to pool the loss experience of high-risk drivers. Four of the laws set up reinsurance facilities. Effective in Massachusetts, North and South Carolina, and New Hampshire, these mechanisms require insurance companies to accept all applicants for automobile insurance if they have valid driver's licenses. The insurance company in the underwriting process may decide to cede (reinsure) some of the highest risks to the reinsurance facility of its state, which operates a combined pool for all reinsured risks. Reinsurers can then reinsure part of their exposure. This process is called retrocession. The amount of business with the reinsurer is called the ceded amount. The placing of business placed with a reinsurer is called cession. Losses and expenses of the facility are shared among all the insurance companies in proportion to the total automobile insurance they write in that state. Canada has had in effect a reinsurance facility for more than 15 years.
Reinsurance is the transfer of insurance from one insurance company to another insurance company. It is the insurance purchased by the insurance companies themselves. An insurance company's losses can be quite substantial and into the millions (if not billions of dollars). Fortunately, one insurance company does not have to bear the brunt of all the losses. The fact that accidents and catastrophes do occur explains the important purpose of reinsurance, the diversification of exposures and losses. One insurance company can write large amounts of insurance on a single property, or in the case of residual market mechanisms, the reinsurance shifts part of the risk to the reinsurance facilities. Large losses are thus shared, and excessive losses in one occurrence do not cause financial instability of individual insurance companies. Without reinsurance, each insurance company would be limited to its own financial ability to pay losses. With reinsurance, financial strength is enhanced by the spreading of losses throughout the entire insurance business, or within the insurance companies participating in the state reinsurance facilities.
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Reinsurance allows for more rapid growth by having a reinsurer take over from the insurer part of the requirement for maintaining reserves. |
Reinsurance also has other purposes. There are reserve requirements for insurers on insurance policies that, if a disaster were to occur, could cause a drain on surplus and restrict growth, particularly for newer and smaller companies. Reinsurance allows for more rapid growth by having a reinsurer take over from the insurer part of the requirement for maintaining reserves, thus permitting the insurer to increase their policies. Reinsurers offer many technical advisory services to new insurers or those expanding to new types of insurance or territories. For the reinsurer the motivation is obvious - profits.
Reinsurers are of two basic types:
1. Professional reinsurers who write nothing but reinsurance business.
2. Reinsurance Departments who write mostly insurance but also some reinsurance.
Reinsurance may be classified broadly under the terms listed below.
1. Treaty Reinsurance: the insurer must cede the amount of insurance required under the contract agreement and the reinsurer must accept the amount offered. Treaties may cover a range of perils and they avoid the time-consuming negotiations necessary when reinsurance has to be arranged for each contract.
2. Facultative Reinsurance: the insurer determines for each case whether reinsurance is desired. If so, the reinsurer retains the right to accept or reject each proposal on its merits. A new contract must be negotiated for each case.
3. A combination of the two.
The policy may be written as proportional (pro rata) or nonproportional. Under proportional reinsurance an insurer shares with a reinsurer on a proportional basis both the premiums and the losses. Pro rata reinsurance may be used by new insurers that lack underwriting skills.
Within the proportional or pro rata reinsurance are:
1. Quota share, and
2. Surplus share.
Quota share reinsurance is shared with the reinsurer, having the same proportion of every policy - large and small. Surplus share reinsurance has the participation calculated separately for each policy.
Nonproportional reinsurance can be classified into two major categories:
1. Excess loss, and
2. Stop loss.
Under excess loss reinsurance the reinsurer is required to bear only those losses in excess of the ceding insurer's retention limit. This leaves the ceding insurer to bear losses in full up to the retention amount. Excess loss reinsurance may be written as individual per-risk reinsurance (the reinsurer agrees to pay losses on a single risk in excess of the ceding insurer's net retention limit.) or catastrophe risks reinsurance (the reinsurer agrees to reimburse the reinsured, up to a stated maximum, for catastrophe losses in excess of a given retention amount per disaster).
The ceding insurer uses stop loss reinsurance to control their loss ratio (the ratio of incurred losses to earned premiums). This plan has a stop-loss limit. The limit is the higher of a given percentage of the ceding insurer's net earned premium or a specified dollar amount. The reinsurer is liable only for the insurer's aggregate losses exceeding the applicable stop loss limit up to a specified maximum. This maximum is either a predetermined percentage of the insurer's net earned premium or a fixed dollar amount - whichever is less.
A special type of reinsurer is the reinsurance pool. This is an association for the exchange of reinsurance among two or more insurers according to an automatic agreement. Each of the insurers receives a certain portion of the risks or losses of the other reinsurer(s). Each gives to all the others a predetermined part of its risks or losses. These pools are also used for spreading infrequent catastrophic types of risks among insurers of a company group or fleet.
Under the same category as residual market mechanisms, some states have established Joint Underwriting Associations (JUA), which differ from the reinsurance facilities in that they identify a small number of insurers as servicing carriers which issue contracts, collect premiums and pay claims on behalf of the JUA. The Joint Underwriting Associations (JUA) is proportionally owned and operated by all the insurance companies doing business in that state.
Each agent or broker is assigned a servicing carrier in order to provide all agents and brokers with access to a market in which to place the higher risk drivers. The Joint Underwriting Associations (JUA) establishes rates and commissions for high risk drivers within the state. Hawaii mandates that welfare recipients are entitled to free automobile insurance (up to a statutory minimum limits).
A few states chose to insure canceled or rejected drivers in an automobile insurance state fund. The state-operated company guarantees the availability of 100/300/100 liability and physical damage limits and other coverages written through all the regular agents and brokers in the state. Claims are handled by the fund's own personnel. Deficits have been so large that now the insurance companies are assessed proportionally, which in effect causes the voluntary market insured to subsidize the annual residual market deficits.
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Unsatisfied Judgment Funds (UJF) provides the innocent victim of an automobile accident with a source of payment for losses caused by a financially irresponsible motorist. |
Unsatisfied Judgment Funds (UJF) legislation has been adopted by only five states. Another area of concern is the unpaid victims of automobile accidents. This type of legislation provides the innocent victim of an automobile accident with a source of payment for losses caused by a financially irresponsible motorist. A separate unsatisfied judgment fund is established with the purpose of paying bodily injury losses. In addition, some states add property damage losses:
1. If the victim proves liability by obtaining a judgment against another party who was negligent in causing the accident, and
2. If the victim shows that the judgment cannot be recovered (remains unsatisfied).
The basic limits of coverage apply of 10/20/5 with a deductible of $100 to $200 for property damage. Negligent motorists are not relived of liability for the damages or injuries they have caused. The negligent motorist's driving privileges are revoked until the unsatisfied judgment fund (UJF) has been reimbursed for the amount paid to the innocent victim.
Funding for this type of legislation differs from state to state.
1. Some states gain the basic financing through a levy, normally assessed against the uninsured motorists of the state. The charge to uninsured motorists has grown sharply in recent years. This fee is for the right not to purchase automobile liability insurance and it does not provide any liability protection for the uninsured motorists.
2. States have charged insured motorists a fee at the time of registration.
3. States charge the insurance companies writing automobile business about one half of one percent of their net premiums.
There are advantages and disadvantages, as with any of the legislations passed. The advantages:
· Providing some recourse to innocent victims,
· Keeps more irresponsible motorists off the road, and
· A small reimbursement of the funds (about five percent by the uninsured motorists).
The disadvantages:
· The financial inequity of the costs being paid by insured motorists (if that is how the state collects the UJF).
· The fund deficits that have resulted from inadequate levies, and
· The complicated and expensive procedures used by the funds.
Uninsured Motorists Coverage (UMC) has been implemented in all states. That is to say that the states require that uninsured motorists’ coverage be offered in automobile insurance contracts. This is a typical method used to provide payment to victims of automobile accidents caused by financially irresponsible motorists. For a relatively small cost an insured motorist can include this coverage in their own automobile insurance contracts. This is protection for the entire family as car occupants and pedestrians against losses caused by an uninsured motorist. Uninsured motorist coverage includes payments for medical payments and loss of income payments. Other individuals riding in the insured automobile are covered and the coverage extends to other cars driven by an insured. Uninsured motorists’ coverage also covers hit-and-run cases where the victims normally cannot collect their damages because they have no one to ask for payment from.
Individuals who do not want this coverage may be able to give written refusal to have such coverage included in their insurance contract. Many states, though, make UMC coverage mandatory so it must be included in all automobile insurance policies written in those states. Coverage can vary widely between states. Most states require 10/20 limits, and higher limits can be made available. Property damage coverage is included in only a few states. In the last few decades, auto insurance contracts may also include underinsured motorist coverage.
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Uninsured motorists coverage is liability insurance, not accident insurance. |
Uninsured motorist coverage gives payments to innocent victims without a separate system such as the Unsatisfied Judgment Funds legislation laws. Uninsured motorist coverage does not require the victim to secure a judgment against the wrongdoer. However, the victim must show that the negligent party had no liability insurance. Since uninsured motorist coverage is paid by the victims, delays and administrative costs are reduced since the insurance company pays the insured for the injuries for which the uninsured motorist is liable. States can use an arbitration process to arrive at a fair payment figure for the insured. Uninsured motorist coverage is only for bodily injury. Property damage is not covered.
Supporters of UMC contend that it is a valuable and relatively simple solution to many of the problems of unpaid automobile accident victims.
Those who oppose UMC contend that it would be more equitable to have the uninsured motorists pay the costs, rather than the insured.
An insurance company may have difficulty determining an uninsured motorist is at fault or liable in an accident, because then the insurance company must pay the insured under UMC. This can be a potential conflict of interest.
An expansion of UMC in most states includes within the definition of "uninsured motorist" a provision for which coverage is extended even when liability insurance is in effect at the time of an accident but is uncollectible because of the insolvency of the insurance company. Insurance companies who insure high-risk drivers resulting in large losses may find themselves with insolvency problems.
Automobile no-fault insurance plans are found in approximately 25 states. The basic philosophy of no-fault plans is that an individual should be compensated for medical expenses and income losses by one's own insurance company, regardless of fault. No-fault plans have gone under great scrutiny because of the misunderstandings associated with the definitions that have been attributed to these no-fault plans. The actual meaning of "no-fault" in a no-fault system is the abolishment of tort liability in automobile accidents with drivers or owners accepting responsibility for some or all losses sustained by pedestrians and by occupants of their own vehicles in return for immunity from liability for those losses. The no-fault plans allow the insured, in most cases, to collect directly from their insurance company because the need for establishing fault before payments is largely eliminated. Thus, it could be said that no-fault insurance is primarily first-party (the insured), rather than third-party (other persons) insurance coverage. Tort liability actions are either eliminated, or more usually, restricted to the more serious losses.
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The purpose of tort law is to place the accident cost on the negligent party. |
There are differences between no-fault plans, some of these distinctions between the plans are:
· "true" or "pure" no-fault plans,
· "modified" no-fault plans, and
· "pseudo" no-fault plans is important.
True no-fault plans abolish all liability claims. The injured parties are compensated by their own insurance companies regardless of fault and may not initiate tort action against the negligent party.
Modified no-fault plans where tort liability suits are only permitted in cases of serious injuries have been adopted in about 16 states. If the inured party's medical expenses and loss of income do not exceed a specific amount, the plan operates like a true no-fault plan. If the injured party's medical expenses and loss of income exceeds the limit, they may sue the negligent party for the excess amount as well as for such non-economic losses as pain and suffering. If the injuries result in death or permanent disfigurement, modified no-fault laws allow unlimited tort action of the negligent party.
Pseudo no-fault plans involve no restriction on liability lawsuits, although they do expand medical expense and income loss payments of the first-party injured insureds. This has been adopted in about eight states.
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There can be "add-on" plans, which are additional coverages included in the insured's auto liability policy without impairing the right of the injured party to sue the wrongdoer. |
There can be "add-on" plans, which are additional coverage included in the insured's auto liability policy without impairing the right of the injured party to sue the wrongdoer. Several states provide the addition of no-fault benefits called add-on no-fault benefits. Some may say that it is contradictory to call a plan a no-fault plan when the victim is allowed to sue the wrongdoer. In essence, these plans grant expanded medical and disability benefit payments not found under traditional auto medical payments coverage. These laws usually require arbitration of disputes involving the question of liability or damages.
One of the first no-fault plans passed, called the Colombian Plan, advocated a true no-fault plan in 1932. The Colombian Plan would replace liability payments with no-fault compensation benefits as the only payment to injured parties. There have been countless attempts at no-fault legislation. State governments have looked at Canada's plans trying to come up with the best possible protection for unpaid auto accident victims. Since 1946 the Saskatchewan Plan has required compulsory automobile accident insurance in quite limited amounts, regardless of fault. Others proposals have even toyed with the idea of passing a federal no-fault law that would set minimum standards for the states. This was first considered was in 1971. The bill, which failed, would have established a national compulsory no-fault system that would have paid all medical and rehabilitation expenses for accident victims. Lost wages would have also been reimbursed up to a specified amount. There were also bills introduced in 1977 and 1978 that were not adopted but would have established federal standards for state-administered no-fault automobile insurance plans.
There are other plans which have been experimented with in the past. These include:
1. The Family Compensation Plan: introduced in the 1950s making available to their policyholders the option of purchasing limited alternative compensation benefits for all injured persons in an automobile accident. This type of coverage was discontinued in 1967 when studies showed that filing tort claims was not discouraged.
2. The Conard Plan: was not adopted by any state. This plan would have integrated social security disability income (SSDI) payments and Medicare-Medicaid medical expense payments by deducting such payments from tort liability claims.
3. The Keeton-O'Connell Plan: introduced in 1965, a modified no-fault plan called basic protection insurance. The plan's purpose was to do away with most automobile tort liability lawsuits by having the insurance companies pay the insureds for most out-of-pocket medical expenses and income losses of up to $10,000 per person. It permitted regular tort claims only for pain and suffering losses exceeding $5,000.
4. The Guaranteed Benefits Plan: offered automobile accident victims a choice of taking advance payments for some medical expenses and lost income, or suing under normal tort liability law. Competing insurer organizations advocated these types of voluntary approaches.
5. Complete Personal Protection Plan: proposed by the American Insurance Association. This plan proposed a system where the insured's own insurance company provided complete personal protection for automobile accident injury payments. This plan abandoned the fault concept completely for economic losses, medical expenses and wages.
Other plans legislated outside the mainland U.S.:
6. The Social Protection Plan: became effective in Puerto Rico in 1969. The plan pays unlimited medical benefits, death benefits up to $10,000, disability income of 50 percent of salary for two years with low weekly maximums, and other scheduled dismemberment and funeral benefits.
7. The Canadian Plan: adopted by most Canadian provinces in 1969. Under this plan private insurance companies pay injuries on an optional no-fault basis up to $5,000. Poorer risks are reinsured in a reinsurance facility that reduces the alleged social stigma of being placed in an assigned risk or automobile insurance plan. An evaluation of this plan has found continual problems of underwriting losses.
Massachusetts was the first state to enact a no-fault law in 1970 and by 1975 16 states had legislated no-fault benefits. Since then, a few states have repealed that legislation.
In the states that have no-fault laws, the differences of benefits and restrictions vary widely. The no-fault benefits for medical expenses are limited to a predetermined figure. There are restrictions on tort liability lawsuits. Vehicle damage liability does not come under the no-fault laws, so the tort system still applies. There are also property damage limits.
Supporters of no-fault laws contend that there are benefits besides costs. They also contend that the purpose of no-fault laws is to pay the accident victims more of the insurance premium dollar in a quicker manner and more equitably. The overall effectiveness may not be fully known for quite a few years. In short term studies, it has been found that the victims still do not receive the premium dollar amounts for the injuries suffered. On the positive side, the frequency of bodily injury liability claims has been cut substantially in states with no-fault laws.
Those who oppose no-fault laws contend adamantly that they do not reduce automobile costs and argue that legislation should not take away an individual's right to sue for pain and suffering. The effect of no-fault laws on personal responsibility for negligence, with possible increased carelessness as a result, is pointed out as a major defect. As the short-term studies showed in the above paragraph, injured parties may suffer serious losses and only be partially compensated under the no-fault system. Their rates could also be increased while the negligent party has only to apologize for their irresponsibility. The negligent party suffers no losses and no rate increases.
Safety and Loss Prevention Plans have been adopted by many states along with federal and industry plans. Traffic safety, or loss prevention in regard to automobile accidents, has been a major objective in the last few years. Few of the insurance solutions discussed have included accident prevention among their goals.
There are many plans and efforts being made to better educate and promote stiffer penalties for high-risk drivers, such as driving while intoxicated (DWI). Often called driving under the influence (DUI) because that term includes drug use. Efforts are being made to coordinate the safety work of insurers, government and independent researchers, such as those in universities. The Insurance Institute for Highway Safety promotes research studies and traffic safety conferences. On the government level, the National Highway Traffic Safety Administration formulates safety regulations for state and automobile manufacturers for crash-worthy bumpers, seat belt systems, air bags, child safety seats and other safety designs and equipment. The bureau lists the top priority areas as:
1. Driver licensing,
2. Traffic records,
3. Alcohol,
4. Emergency medical services,
5. Motor vehicle registration,
6. Police services, and
7. Accident location and cause research.
Public cooperation in accident prevention could be better. Although most states now require the wearing of a seatbelt, drivers still do not use them. Speed limits are not given the attention they deserve, which has been proven to save lives. People would rather have the "coolest" car, than the safest one.
End of Chapter 3