Choice in automobile insurance would reduce rates and make bad drivers pay.
The "auto choice" reform bill now being considered by Congress has inspired a large controversy one might think rather odd for a simple matter of tort reform. Unfortunately, when it comes to the law, nothing is simple. Even my good friend George Priest, a professor of law and economics at Yale University, has raised objections to the bill, in a recent issue of The Wall Street Journal (July 21, 1998). His article is a good, concise summary of the current arguments against the proposed automobile insurance reform.
The bill ensures drivers an opportunity to choose less-expensive automobile insurance in exchange for foregoing the ability to claim pain and suffering awards in case of an accident. The reform’s sponsors see it as promoting freedom and responsibility while reducing insurance costs. It is important to consider this issue seriously, because auto choice can have a significant effect on the nation’s legal and social climate.
As Professor Priest reads it, the law will eliminate insurance surcharges against dangerous drivers and restrict injured parties to "no-fault" claims against their own insurers. A driver, he writes, "could not sue if hit by a driver who has disclaimed pain and suffering; in such a case, the injured driver would have to recover against his own insurer."
He also believes that the bill will oblige people whose parked cars are hit by negligent drivers to foot their own repair bills. "If your parked car is hit by a drowsy, careless, or inexperienced driver," he claims, "under auto choice the repair cost would be built into your insurance premiums, not the offending driver’s." Thus, he claims, "Under auto choice, the premiums of high-risk drivers would go down because they would no longer have to pay for the costs they impose on others. The premiums of careful drivers would ultimately go up because they could no longer recover from high-risk drivers who injured them."
He flatly claims that the proposed reform "will eliminate lawsuits" in auto accident cases and "is likely to harm every responsible driver in the country. For the most important choice it offers is the opportunity for high-risk drivers to escape responsibility for the accident costs they impose on the more careful. Auto choice may reduce insurance premiums initially," he concedes, "but its principal effect will be to increase the accident rate."
Given his reading of the bill, it is hardly surprising that Professor Priest predicts that it will subsidize bad drivers and make our highways more dangerous and deadly.
One wonders how in Heaven’s name such a terrible bill could have been sponsored by a wide variety of careful, distinguished senior Democrats and Republicans such as Pat Moynihan, Dick Armey, Jim Moran, Mitch McConnell, and Joseph Lieberman. How could it have been endorsed by mayors such as Rudy Giuliani and the incoming president-elect of the U.S. Conference of Mayors, Denver’s Wellington Webb? And by Michael Hightower, Fulton County chief executive and past president of the National Association of Counties? What could the U.S. Chamber of Commerce possibly have seen in it, or policymakers ranging from Steve Forbes and John Engler to Michael Dukakis? One wonders how the bill’s authors (myself included) could have devised such a manifestly inappropriate proposal and got it past such distinguished policymakers.
The answer is that we haven’t done any such thing. The sad, simple (and uncharacteristic) fact is that Professor Priest and its other opponents have spectacularly misread the bill and its likely effects.
Free to Sue
Contrary to Professor Priest’s central claim, the auto choice bill permits injured parties to sue negligent drivers for all medical costs, all lost wages, all rehabilitation expenses, and all other out-of-pocket accident costs that exceed first-party insurance coverage, and to do so to the very last penny. (The bill even requires insurance policies to pay reasonable attorneys’ fees for such claimants.) For that reason, and because the bill will dramatically reduce the number of low-dollar fraudulent claims generated by today’s "pain and suffering" awards, it will increase premium differentials between regular and dangerous drivers. In technical terms, the bill will cause risk factors for accident severity to be more negatively rated than those for accident frequency—thereby causing dangerous drivers to pay higher relative rates than they do today.
Another—and particularly glaring—example of opponents’ seeming failure to understand the reform bill is Professor Priest’s allegation that the proposed legislation would transfer property damage costs from perpetrators to victims. In fact, the bill applies only to bodily-injury claims and will have no effect whatsoever on the 55 percent share of premium dollars that pay for automobile property insurance.
The heart of the auto choice reform proposal is that it unbundles the economic damage elements of auto tort law from the noneconomic ones intended to compensate accident victims for their pain and suffering. It would thereby enable drivers to decide whether to participate in a pain and suffering damages regime that awards three dollars in cash for every dollar of incurred health care costs—a system at the heart of today’s epidemic of fake medical claims, grossly excessive incidence of physician and chiropractor visits, and steadily increasing rate of injury claims for every auto accident. For a typical example of today’s mounting fender-bender to whiplash ratios induced by the perverse incentives of pain and suffering law, note that auto tort lawsuits in the District of Columbia increased by 137 percent between 1985 and 1995 even though the number of automobile accidents in D.C. declined by 22 percent.
Despite the obviously corrupting and perverse incentives of the pain-and-suffering regime, Professor Priest and other reform opponents describe the current system’s high and increasing payouts as "true costs" of a rational compensation scheme. The leading legal ethics treatise, by contrast, gets the definition of such claims just right: "inflated . . . damage [awards] tolerated by courts as a rough measure of plaintiff’s attorney fees." Under the current system, accident victims endure the pain and suffering while their attorneys pocket the money.
Need for Reform
Ironically, most of us who support auto choice reform do so precisely because it optimizes what Professor Priest and other opponents quite rightly deem necessary: "[requiring] high-risk drivers . . . to bear … responsibility . . . for their own careless driving." Although Professor Priest doesn’t deny that today’s system is in need of reform, he nonetheless asserts that it broadly meets the objective of compelling bad drivers to pay for the accidents they cause. He is wrong. Fraud-driven pain-and-suffering payouts have increasingly pushed auto insurance costs far beyond the point of affordability for millions of low-income drivers and increasingly threaten the ability of urban and middle-class drivers to afford even minimal-coverage insurance. Almost 30 percent of all drivers in California are currently uninsured, for instance, as are more than half the drivers in many major American cities.
Even more alarming is the increasing incidence of underinsured drivers unable to afford more than state-law-mandated minimum coverage levels which are proving increasingly inadequate to compensate injured parties. The result? Because today’s system pays out most of its dollars for legal fees and "soft tissue injury" claims induced by pain-and-suffering multipliers, it has little money left over to pay innocent, seriously injured victims of dangerous drivers. Thus, whereas auto accident claimants with $1,000 in damages receive payments averaging $2,500, those with economic damages exceeding $100,000 are paid only 9 percent of their costs—9 cents on the dollar!
An equally telling—and quite astonishing—indication of the perverse effects of the current system is that for every dollar compensating auto accident victims for the economic costs of their injuries, almost $2 is paid to lawyers and almost $.90 goes for fraudulent and unnecessary medical treatments. In short, there is no way that today’s system can plausibly be said to force high-risk drivers to pay for the serious injuries they cause.
Professor Priest’s notions of how to reduce insurance and litigation costs—something he acknowledges to be necessary—are equally problematic. His only big-dollar proposal—"enhancing enforcement to keep uninsured drivers off the road"—is neither appropriate nor even remotely plausible. Today, a $20,000 to $40,000 minimum-coverage policy for a twenty-year-old Baltimore male costs $3,214 per year; the tab for a thirty-eight-year-old Los Angeles woman wanting standard $100,000 to $300,000 coverage is $3,461. Clearly the government cannot, and should not, compel minimum-wage earners to spend 30 percent or more of their disposable income to buy minimum insurance coverage. Numerous studies have shown a direct relationship between accessibility of automobiles and a person’s ability to find and keep a job. "Enhancing enforcement" of auto insurance requirements would simply take the cars away from almost 30 percent of all California drivers and more than half the drivers in many major cities.
Even if the taxpayers were willing to pay for the mother of all welfare-cost overruns sure to follow any serious enforcement of uninsured-motorist laws, and for the police who would have to be added to make it happen, it would not be socially just for governments to compel tens of millions of Americans to purchase unaffordable minimum-coverage policies that would still be grossly inadequate to compensate victims of all but the most minor accidents. Professor Priest’s other major proposed reform—eliminating assigned-risk pools that mandate higher but still-subsidized coverage for accident-prone drivers—is both impolitic and impractical. It would raise insurance rates for many drivers, which makes it both politically unworkable and sure to engender a massive increase in the number of uninsured motorists.
The only way to make auto insurance costs broadly affordable again is by allowing drivers to escape the current pain-and-suffering regime which costs Americans an astonishing $35 billion per year—an investment for which they receive "hit me, I need the money" fraud, inadequate compensation for real automobile-caused injuries, a systemic preoccupation with claims of whiplash and other spurious injuries, and rising numbers of uninsured and underinsured motorists. Lawyers, by contrast, receive more than $15 billion per year from the system. Auto choice would apply the system’s resources to medical, rehabilitation, wage, and other related losses and radically reduce the current lawyer-friendly transaction costs. It would put the money where both its proponents and opponents agree that it should go.
I fully share Professor Priest’s and other reform opponents’ objections to "no-fault" statutes that eliminate surcharges against negligent drivers or restrict the right to sue. Although Professor Priest’s analysis of the safety effects of such laws is badly flawed and not generally shared by scholars, my Old Testament instincts are nonetheless with him in wanting to bend every effort to make bad drivers pay for the havoc they wreak on others.
Happily, and by conscious design, the broadly supported auto choice bill—now moving through Congress despite a multimillion-dollar lobbying campaign against it by tort attorneys—is a vital step in precisely that direction.