January 20, 1999 revised February 12,1999
What Sort of Liability Insurance
Should Premiums Paid at the Pump Buy?
A Proposal for Catastrophic Loss Coverage
Stephen D. Sugarman
I. Introduction and overview
Recent discussions of "pay at the pump auto insurance," including that by Professor Daniel Khazzoom(1), have assumed that the money collected at the pump would pay for whatever level of mandatory minimum liability insurance that is required by the state where the plan is enacted. For example, this required coverage might be liability insurance for bodily injury in the amount of $15,000 per person and $30,000 per accident, plus liability insurance for property damage in the amount of $10,000 per accident.
In this brief comment, I want to argue that pay at the pump proposals might be more attractive (socially and politically) if the proceeds were instead used to provide all motorists with a different sort of liability insurance protection.
My original pay at the pump proposal(2) (as well as that advanced by Andrew Tobias(3)) envisioned a comprehensive auto no-fault insurance scheme. Even though my own personal preference continues to be a combination of pay at the pump with no-fault, I will simply rule out such a package for purposes of this comment. Some other pay at the pump advocates have called for the funding of uninsured motorist coverage.(4) I put that proposal aside for the moment as well.
Rather, my suggestion here is that pay at the pump proceeds buy liability insurance that would cover the personal, non-pain and suffering, tort damages associated with serious injuries only. More precisely, this insurance would provide bodily injury coverage, but only for real financial losses (such as wage losses, medical and other expenses, and rehabilitation costs, plus, probably, reasonable legal fees for the victim's attorney). And it would be available to cover the tort claims of victims of the insured only if they suffer serious harm. No payments would be made when victims suffer non-serious harm, and none would be made for property damage.
For these purposes, let me assume that serious harm would be defined as it is now defined under Michigan's or New York's auto no-fault plans.(5) Basically, these plans require meeting a high verbal thresh-hold, like, "serious and permanent impairment or disfigurement or disability lasting more than six months."
The idea, in a sense, is to provide catastrophic liability insurance coverage for grave injuries -- using a verbal rather than dollar definition of what constitutes a grave injury. One could spell out more precisely in the legislation just what constitutes a serious and permanent impairment or disfigurement (drawing on the Michigan and New York experience), or one could leave that to development by the Insurance Commissioner, or even possibly by the courts.
As cast so far, this coverage would be unlimited in amount. But it need not be so. Perhaps it might be limited to $500,000 per person and per accident; or possibly $1 million. Further discussion of this issue is taken up later.
II. Background
A. The vast under-compensation of seriously injured victims
If we divide today's auto accident victims into those with serious personal injuries and those without, we see that the former are badly under compensated by the existing tort law/liability insurance system. This has been documented over and over again (e.g. by DOT, RAND, NY, and Michigan studies).(6)
As I understand the data, perhaps 25% of such victims are barred from recovery by the tort law itself.(7) They are injured in one-car accidents when no one (other than themselves probably) is at fault. Or it is a two car crash and they alone are at fault, or at least very largely so. Or they just cannot prove the other driver is at fault, even if he or she was. In all such cases, the law puts the loss on the victim (or mostly so). I don't propose to change any of that with my proposal here.
Of the remaining victims, a significant are without tort recovery from their injurer because he or she is uninsured. Nationwide data suggest that perhaps 15-20% of motorists are uninsured (with much higher numbers in certain states like California).(8) Plus my discussions with experts in the field lead me to believe that uninsured motorists cause more than their proportionate share of serious accidents.
Less well noted is the fact that a huge proportion of insured motorists are under-insured. I have not been able to obtain recent reliable data, but I have had discussions with several knowledgeable experts who have agreed that it would not be wrong to assume that half of those who are insured carry "50/100 BI" or less.(9) This means that they have only $50,000 of coverage per victim, and that sum is often gone in a flash if there is a serious injury.
To be sure, the problem of both the uninsured and the under-insured motorist might be ameliorated, as a practical matter, by the purchase of a high level of uninsured/under-insured motorist insurance ("UM"). But again I have been told by experts that people tend to buy no more UM coverage than they buy BI coverage.(10)
The uninsured and under-insured motorist problem, of course, causes lawyers to look around for other deep pockets to sue -- servers of alcoholic beverages, highway designers and maintainers, employers, auto makers and repairers, etc. But frequently none is liable for the accident.
Simple math, then, suggests these results:
Of 100 serious injured victims
25 are denied recovery by tort law
15 lose out because of uninsured motorists (20% of 75%); and
30 lose out because of under-insured motorists (50% of 60%) (plus hit and run motorists who have insurance?)
This leaves only 30 in 100 who stand to be fully compensated. (In fact, I believe, the actual numbers are worse.)(11)
B. Why we have an insurance shortfall
In the U.S., in contrast to many other countries, we are not serious about forcing motorists to carry liability insurance, and we are not at all serious about forcing those who do carry insurance to carry adequate sums to cover those they may seriously injure. These insurance decisions may be "rational" from the viewpoint of individual motorists. Some are either fully judgment proof or can count on not having their hard-to-reach assets pursued if they have even a modest insurance policy to tender to the victim. But they are, in my view, morally irresponsible decisions -- at least so long as we have a tort law system.
Many might agree with my viewpoint. Yet, we have to face the reality that auto liability insurance is very expensive in the U.S., public transport is often poor, and hence there has been a reluctance seriously to insist on high cover that would really protect the seriously injured. Moreover, the seriously injured of course comprise relatively few of those who are injured in auto accidents, and hence even low levels of BI coverage serve to take care of the large majority of claims. It is this very decision contained in our existing mandatory insurance laws -- to sacrifice the interests of the few who are badly hurt to the many who are not -- that troubles me.
Indeed, non-seriously injured victims are, in my view and in the view of many others, substantially over-compensated by the current system. Those who have even a plausibly valid tort claim certainly tend to obtain well more than their actual financial losses. The excess is largely for pain and suffering, to which they currently have a legal right. But as a policy matter, this is at least questionable. This is pain and suffering that is typically long gone before the money is obtained. In any event, the nuisance value of small injuries forces many insurers to pay off those claims for more than they are "worth" -- just to clear their books of claims, to avoid large litigation defense costs, and to eliminate the risk of a possible huge verdict by a "runaway" jury.(12)
III. Cost implications of using pay at the pump to fund "hard" compensation for tort claimants with serious injuries - curtailing the right to sue for pain and suffering in non-serious injury cases
Suppose now that a states decides to charge X cents per gallon at the pump and uses the money to provide liability insurance that would well compensate the seriously injured for their "hard" damages (or at least those with valid tort claims). This could extend cover to the 45% of seriously injured victims who, it was estimated above, now go uncompensated or vastly under-compensated.
There are two reasons that might justify limiting the amount of cover provided by this new scheme. First, many people would say that well-insured motorists today buy $500,000 single limit liability insurance; or they buy $300,000 single limit (or even 100/300 BI) with a $1 million umbrella. Hence, we might start by having pay at the pump assure all motorists with $500,000 of liability insurance coverage for the "hard" damages they cause to those they seriously injure. Secondly, this limit would hold down the cost of the proposal and make pricing of the coverage more predictable.
Such a scheme, of course, would impose new costs on both the uninsured and on the under-insured. I think it is fair to assume that those who are now well insured would, as a group, obtain premium reductions roughly equal to what they now pay for the higher levels of coverage that would no longer be needed given the coverage guaranteed by the pay at the pump plan.
Imposing new costs on the uninsured would be welcomed in many quarters: everyone is finally paying his or her way, and especially to protect those who are gravely injured by their negligence. This proposal could also be combined with the repeal of existing mandatory insurance laws. After all, the formerly uninsured are no longer uninsured. Although they may remain uninsured for non-serious injuries, they are now covered for the liability society had deemed most important by covering it universally via pay at the pump -- i.e., serious injuries. Were today's mandatory insurance laws repealed as part of the package, this would surely be welcomed by many who lobby on behalf of the uninsured and dislike the increasingly draconian penalties that are being imposed on those uninsured who happen to get caught.
But imposing higher motoring costs on those, say, 50% of currently insured motorists who are now under-insured would, I predict, be politically difficult. These people would (mostly) not dare drop their existing insurance for smaller injuries, even if the mandatory coverage law were repealed. To be sure, some would applaud making these drivers provide the fuller coverage that the well-insured now provide. But still raising effective auto insurance rates on this large group of motorists can not be popular.
There is, however, a possible way to offer a trade that would, I bet, offset (probably more than offset) this new cost increase to the currently under-insured: impose a thresh-hold on the right to recover pain and suffering damages. And suppose that thresh-hold is the same "serious"injury standard discussed before.
Note well that if there is no tort liability for pain and suffering for non-serious injuries, those who continue to buy the first/lower level of BI coverage would pay less for it than today. Indeed, they would also pay less for their UM coverage because that too would pay off less in case of a non-serious injury. Although I have not yet been able to do the sums, let's assume I am right that this would mean a swap, or probably a reduction in net payment for insurance plus at the pump as compared with insurance alone today.
Let me be clear about what this would mean for victims: if they are in non-serious injuries, they would get less recovery than they do now; but if they are in serious injures, that large proportion who are now uncompensated or under-compensated because of insurance shortfalls would become generously covered for their "hard" losses. This, I believe, is a socially desirable trade.
Let me now walk through the insurance implications for individuals. Assume first that people continue their current practices. Then those who now buy high levels of BI coverage would still buy that coverage -- to provide compensation for pain and suffering to those victims they seriously injure. Tort law for those victims would remain the same. These high limit insureds, plus those who now buy low levels of BI, would also still buy protection for the "hard" losses of those with non-serious injuries. The uninsured would still buy nothing directly from insurers.
But note, some motorists might change what they buy under the new scheme. Maybe the now seemingly lower cost of high levels of BI coverage (since it only applies to pain and suffering) would cause more people to buy it. Maybe some uninsured motorists would now voluntarily buy at least some coverage because it would cost less. Would others buy less than now? This does not seem likely to me, but it is worth thinking about.
IV. Administration of the proposed pay at the pump coverage
The government could be the risk-taker and simply contract out claims administration as it has traditionally done in Medicare. Indeed, it could create an independent insurance corporation with its own claims staff, as is done under no-fault schemes in Quebec or New Zealand (or as done in British Columbia where there is a government monopoly in the sale and administration of BI insurance.)
Or the government might auction off claims obligations on a per head basis so as to shift both the premium risk and claims administration work to the private sector -- presumably to existing insurers. This was Tobias' proposal in his pay at the pump no-fault scheme.
Less dramatically, this plan could be folded into existing liability insurance arrangements in the same general way as envisioned in Professor Khazzoom's proposal. With the pay at the pump proceeds, liability insurers could be paid a lump sum for every BI insured they have (perhaps adjusted by the residence of the insured), and that sum would go toward reducing whatever would be the premium cost that would be charged for the high BI coverage envisioned by the scheme.
For some drivers, perhaps this lump sum would equal or exceed the premium they owe. They could use any excess towards the payment of other insurance they buy from their insurer. Other motorists would have to supplement the lump sum.
Those who don't buy through an insurer in the regular course would have to be handled differently. They might be dealt with via one of the two suggestions made above, or perhaps via something roughly equivalent to today's assigned risk scheme.
The main point is that, for those who already buy insurance, they would continue to deal with their own insurer as now. They would pay, overall, the same as or less than they now pay, and they would get a somewhat different package of BI coverage.
V. Some miscellaneous issues
A. Should the collateral source rule be changed too?
Under the common law, tort damages were determined independently of what insurance the victim has. In short, tort was "primary" and other collateral sources of compensation were "secondary." As a practical matter today this rule means that health insurers are generally entitled to be reimbursed for the victim's claims they have paid out of the proceeds of the victim's lawsuit. But some states have begun to modify this common law rule in various ways, for example, making health insurance "primary" and calculating tort damages to cover only otherwise unreimbursed health care costs. Were the common law collateral source rule reversed as to the tort damages covered by the pay at the pump scheme I propose here, this would clearly reduce considerably the cost of BI coverage for serious injuries. But it would also continue to shift those costs outside the auto insurance system -- as they are largely now shifted because of inadequate insurance coverage. This issue needs more attention.
B. What counts as "hard" damages?
In determining which "hard" damages are covered (i.e. what is not "pain and suffering" or "general" damages?), a legislature adopting the pay at the pump proposal advanced here might specifically attend to some familiar (and difficult) issues. These include (1) how to deal with lost future income of those not in the labor paid labor force at the time of the accident (e.g., the unemployed, students and children, and homemakers) and (2) how to cover the purchase of replacement services (e.g., household help) that the victim can not provide because of the accident. Alternatively, these issues could be left to judicial resolution as they are under tort law today.
C. Why not simply require people to buy higher BI limits (and perhaps combine that with reduced tort rights to pain and suffering recovery)?
At present, however, the uninsured are still unlikely to buy any coverage at all. And recent stepped up enforcement efforts seem mainly to result in the imposition of criminal penalties, rather that sharp increases in insurance purchasing. This problem is overcome by pay at the pump. So too the marginal pricing benefits of the pay as you go feature of my proposal would also be also lost -- even if higher BI limits were both required and effectively enforced..
D. A foot in the door?
The proposal I advance here, if adopted and successful, might pave the way to a greater use of pay at the pump -- say, for non-serious bodily injuries. It could also possibly lead to covering the seriously injured on a "no-fault" basis. Both of these possible extensions would be viewed as attractive to some and not to others.
For example, plaintiffs' lawyers would probably be divided by this plan. Those who have a high volume of small cases would be much worse off. Those who handle serious injury cases would benefit, even if they could only obtain "hard" damages for many of their clients. How this would play out within the ranks of the plaintiffs' bar is uncertain -- but it should be conceded that the organized plaintiff lawyer groups would probably oppose the plan. They might be won over, however, with a smaller reduction in the right to sue for pain and suffering, but that might run into trouble if the under-insured had to pay more than they now do (taking payments at the pump into account). All of this underscores the importance of trying to have this proposal (and variants) costed out -- if the basic idea is at all attractive.
1. J. Daniel Khazzoom, "Addressing the Criticisms of Pay-At-The-Pump and Exploring What it Takes to Make Pay-At-The-Pump Public- and Industry- Friendly" Resources for the Future Discussion Paper 99-14 (January 1999).
2. Stephen D. Sugarman, "Pay at the Pump" Auto Insurance (Berkeley: IGS Press 1993).
4. Daniel W. Sommer, George E. Hoffer, and Elbert G. Miller, "Financing Uninsured Motorists: Premium at the Pump - A California Simulation" Journal of Insurance Regulation (Spring 1995 pp. 359-370).
5. Mich. Comp. Laws Section 500.3135(1)(West 1991); New York Insurance Law Section 5102(d).
6. Alfred Conard, Morgan, Pratt, Voltz and Bombaugh, Automobile Accident Costs and Payments (1964); "Auto Insurance ... For Whose Benefit?: A Report to Governor Nelson A. Rockefeller by the Insurance Department of the State of New York" (1970); U.S. Dept. of Transportation, "Compensating Auto Accident Victims: A Follow-up Report on No-Fault Auto Insurance Experiences" (1985); Stephen J. Carroll, James S. Kakalik, Nicholas M. Pace and John L. Adams, No-Fault Approaches to Compensating People Injured in Automobile Accidents (Santa Monica: RAND Institute for Civil Justice 1991).
7. See generally, Walter Blum and Harry Kalven, "Ceilings, Costs and Compulsion i Auto Compensation Legislation" 1973 Utah L. Rev. 341.
8. Stephen D. Sugarman, "The Uninsured Motorist Puzzle" Crossroads: The Auto Accident Compensation Project (Special Edition 1998).
9. See Carroll, supra note 6 at table D.4.6 showing that, as of 1986, more than 50% of insured motorists in states without no-fault laws carried $50,000 or less of BI coverage.
10. Id. at table D.4.12 showing that, as of 1986, more than 80% of insured motorists in states without no-fault laws carried $50,000 or less of UM coverage.
11. Id. at table G5.6 reporting that, in states without no-fault plans, personal injury victims with more than $100,000 in economic losses receive, on average, total compensation equal to only 9% of those losses.
12. Id. at table G5.6 reporting that, in states without no-fault plans, personal injury victims with economic losses of $2,000 and less receive, on average, total compensation equal to approximately 250% of those losses.