Chapter 23 Outline
I. Approaches for Compensating Automobile Accident Victims A. Financial Responsibility Laws 1. A financial responsibility law is one that does not require proof of financial responsibility until after the driver has his or her first accident or until after conviction for certain offenses, such as drunk driving or reckless driving. 2. Drivers demonstrate financial responsibility by having an insurance policy whose liability limits comply with the law, by posting a bond, or by depositing collateral. 3. Defects of financial responsibility laws—there is no guarantee that all accidents victims will be paid, and accident victims may not be fully indemnified for their injuries. B. Compulsory Insurance Laws 1. Such laws require evidence of insurance before an automobile can be registered or licensed. 2. The major advantage is that an innocent accident victim has some protection against an irresponsible driver. However, recent studies conclude that compulsory insurance laws generally are ineffective in reducing the percentage of uninsured drivers. C. Unsatisfied Judgment Funds 1. Five states have funds from which a person who has successfully sued the wrongdoer but cannot collect may recover for his or her bodily injury. D. Uninsured Motorists Coverage—the injured person’s insurer agrees to pay the accident victim who has a bodily injury (or property damage is some states) caused by an uninsured motorist, by a hit-and-run driver, or by a negligent driver whose insurer is insolvent. 1. The advantages are that motorists have some protection against uninsured drivers, and claim settlement is faster and more efficient than a tort liability lawsuit. 2. However, the uninsured motorist’s coverage has several disadvantages. Unless higher limits are purchased, the maximum paid is limited to the state’s financial responsibility or compulsory insurance requirement; thus, the accident victim may not be fully indemnified for the loss. Also, the injured person must establish that the uninsured motorist is legally liable for the accident. Finally, property damage is not covered in many states. E. Low-Cost Auto Insurance—a small number of states have low-cost auto insurance plans that provide minimum amounts of liability insurance at reduced rates to motorists who cannot afford regular insurance or have few financial assets to protect. F. “No Pay, No Play” Laws—Some states have enacted “no pay, no play” laws that prohibit uninsured drivers from suing negligent drivers for noneconomic damages, such as compensation for pain and suffering.
II.
No-Fault Auto Insurance A. Definition of No-Fault Insurance—after an auto accident involving a bodily injury, each party collects from his or her own insurer regardless of fault. B. Types of No-Fault Plans
1. Pure no-fault plan—accident victims cannot sue at all, regardless of the amount of the claim. No state has enacted a pure no-fault law. 2. Modified no-fault plan—an injured person has the right to sue a negligent driver only if the bodily injury claim exceeds the dollar or verbal threshold. 3. Add-on plan—pays benefits to an accident victim without regard to fault, but the injured person still has the right to sue the negligent driver who caused the accident. 4. Choice no-fault plan—motorists can elect the no-fault plan with lower premiums or can retain the right to sue under the tort liability system with higher premiums. C. Basic Characteristics of No-Fault Laws 1. The majority of states with no-fault laws have modified plans. Three states have choice no-fault plans. 2. No-fault benefits are as follows: a. Medical expenses b. Loss of earnings c. Essential services expenses d. Funeral expenses e. Survivors’ loss benefits 3. Right to sue—restrictions are placed on the right to sue in modified no-fault plans. 4. Exclusion of property damage under no-fault laws D. Arguments for No-Fault Insurance 1. It is often difficult to determine fault in auto accidents. 2. There are inequities in claim payments. 3. Present tort system incurs high transactions costs and attorney fees. 4. Present system is flawed because of fraudulent and inflated claims. 5. Under the present system, there is often a delay in payments. E. Arguments Against No-Fault Laws 1. Defects of the negligence system are exaggerated. 2. Claims of efficiency and premium savings are exaggerated. 3. Court delays are not universal. 4. Safe drivers may be penalized. 5. There is no payment for pain and suffering. 6. The present tort liability system needs only to be reformed. F. Evaluation of No-Fault Laws 1. No-fault plans reduce transactions costs (attorney fees and claim processing costs). 2. No-fault plans match the compensation received from an injury more closely with the economic loss sustained. 3. No-fault plans eliminate compensation for noneconomic loss, such as pain and suffering, for injured people below the threshold with less serious injuries. 4. No-fault plans generally pay benefits more quickly. 5. No-fault plans can yield substantial savings over the traditional system, or such plans can increase costs depending on plan design. 6. On the negative side, fraudulent claims have been a problem in several states.
III. Auto Insurance for High-Risk Drivers A. Automobile Insurance Plan 1. All auto insurers in the state are assigned their proportionate share of high-risk drivers. 2. Advantages: Automobile insurance plans provide a source of insurance and there is less stigma associated with them than the earlier assigned risk plans. 3. Major limitations: despite higher premiums paid by high-risk drivers, automobile insurance plans have incurred substantial underwriting losses; good drivers are subsidizing the substandard drivers; high premiums cause many high-risk drivers to go uninsured; many drivers who are “clean risks” are often placed in the plan; and the driver does not have a choice of insurers. B. Joint Underwriting Association (JUA) 1. Companies pool high-risk business, and each company pays its pro rata share of pool losses and expenses. 2. A limited number of insurance companies are designated as servicing insurers to administer the JUA business. C. Reinsurance Facility 1. The insurer has the option of placing a high-risk applicant in the reinsurance facility. 2. A motorist can pick the company and agent, and no stigma is attached because the driver does not know whether he or she has been transferred to the reinsurance facility. D. Maryland Automobile Insurance Fund 1. Provides auto insurance to state motorists who cannot obtain insurance in the voluntary markets. 2. Exists because of the high proportion of drivers who were placed in the assigned risk plan, high rates charged by private insurers, and difficulties in obtaining insurance by high-risk drivers. E. Specialty Auto Insurers—premiums are substantially higher than premiums paid in the standard market, and the coverage limits are less; actual premium paid is based on the driver’s record. IV. Cost of Automobile Insurance A. Major Rating Factors 1. Territory 2. Age, gender, and marital status 3. Use of the auto 4. Driver education 5. Good-student discount 6. Number and type of cars 7. Individual driving record 8. Insurance score B. Shopping for Automobile Insurance 1. Carry adequate liability insurance 2. Carry higher deductibles
3. 4. 5. 6. 7.
Drop collision insurance on older vehicles Shop around for auto insurance Take advantage of discounts Improve your driving record Maintain good credit