III.  THE LAW AND AUTOMOBILE INSURANCE

 

Ever since the invention of the automobile, there have been laws enacted that specifically address the problems of automobile ownership or operating a motor vehicle.  Local ordinances were enacted when the automobile first was used to any extent, ranging from the operation of a vehicle when near horses or horse-drawn vehicles, to whom would be qualified to operate such a vehicle, and the areas within which automobiles were allowed to operate.  Negligence became a factor as horse-owners considered the automobile owners negligent if their horses bolted at the sight and sound of the vehicles.  These laws and countless others that have been enacted, created a new category of negligence and they place(d) specific obligations and responsibilities on the owners and operators of automobiles.  These particular laws and regulations fall into the following categories, some of which have been discussed in general terms earlier and some applicable only to owner/operator of automobiles.

 

Contributory Negligence – Automobile: 

 

This has been discussed earlier, but in specific application to automobiles, when an automobile accident occurs, under this concept, each party must bear its own damages.  These rules presently exist in approximately 12 states.

 

Comparative Negligence – Automobile: 

This rule is in force in the majority of the states and specifically address Comparative Negligence as it affects automobile accidents.  Basically the recovery of the plaintiff is decreased by the percentage of negligence contributed to the accident by the plaintiff.

 

Guest Statutes: 

These laws regarding automobiles have been repealed in most states and are in force only in a very few states at this time.  These statutes modify the level of care that a driver owes to a passenger (guest) in his/her automobile.  Common law states a guest must be accorded reasonable or ordinary care, but these statutes reduced the amount of care to “gross negligence”, or “wanton or willful misconduct”, etc.  Because of the Guest Statutes, it became very difficult for a passenger in an automobile to recover damages from the driver of an automobile or to take any other legal action.  (Note:  This does not apply to Taxi drivers or other commercial vehicles) 

 

Vicarious Liability: 

In the states that have this law or regulation, vicarious liability usually pertains to incidents where the owner of a vehicle is not in the automobile when a loss occurs, but is nevertheless held responsible for the action of the driver if the driver has the owner’s permission to operate the automobile.  A similar type of statute is  in force in some states, and involves the operation of motor vehicles by minors.  If they become involved in an accident, their parents can be held liable for any damages.  Some states require the parents to accept these restrictions and actually sign for the license for their child.

 

 

 

Compulsory Insurance: 

In certain states (Massachusetts was the first)  drivers must carry liability insurance to protect the general public.  Only a couple of states followed the lead of Massachusetts because the law is so difficult to enforce.  Drivers may cancel their insurance, out-of-state drivers do not have to comply with the law, and there are always a sizeable number of drivers who simply ignore the law.  Several states have enacted compulsory No-Fault laws (discussed later in this text), and most states have enacted Financial Responsibility laws instead of Compulsory Insurance laws.

 

Financial Responsibility Laws: 

These statutes requires that each driver be financially responsible when they operate a motor vehicle.  Contrasted to Compulsory Insurance, financial responsibility can be shown after an accident, and it can be demonstrated by an insurance policy, a deposit with the Department of insurance or a Surety Bond, depending upon the states.  The required liability varies by state, ranging from $10,000/$20,000 Bodily Injury (BI) and $5,000 Property Damage (10/20/5) to $50/100/25 (Alaska).  If a driver cannot show financial responsibility after an accident, they may lose their license and possibly lose their license for their automobile.  Unfortunately, in those case, the injured party may not receive anything even though the injuring party would suffer.

 

Uninsured Motorists Coverage: 

Many states require Uninsured Motorists Coverage with all automobile insurance policies.  This results in the insured's insurance company covering an uninsured motorist at the time of an accident.  Unfortunately, the result is that the insured is paying an insurance premium for an uninsured person, but since the premium for this coverage is not excessive, the results seem to counteract any costs to the insureds.

 

“Standard” and “Basic” coverages. 

Some states (New Jersey in particular) provides two types of personal automobile insurance:  Standard – which provides a wide variety of coverage options, many not available in the Basic plan; and Basic – a low cost policy that provides a minimum of benefits.  For instance, Bodily Injury is an optional coverage on Basic, with a limit of $10,000 for all persons, per accident, and is a required coverage for Standard policies.  Property Damage Liability is required for both policies.  For Medical Expense Coverage (New Jersey, for instance, is a No-Fault state) the limit for Standard policies is $250,000, but only $15,000 per person per accident for Basic.  Further, the Standard policy offers Income Continuation, Death and Funeral benefits, and Uninsured Motorists Coverage.  For further information on these two coverages, if applicable in your states, please refer to the wording of the policies issued in that state, or contact the applicable Department of Insurance.  Since this arrangement is available only in one or two states, further discussion is not provided in this text.

 

NO-FAULT AUTOMOBILE INSURANCE

 

“No-fault” automobile insurance has gained in popularity in recent years as it addresses many of the problems that have evolved from traditional automobile insurance.  On the surface it would create more problems than it solves, for instance, someone is always “at fault” in any accident (except for acts of God, such as lightning striking a car, etc.) and therefore, someone always has to pay.  However, the problems of traditional automobile insurance far outweigh any philosophical difficulties with “No-Fault.” 

 

Our society is mobile, and regulations as to financial responsibility vary from state-to-state.  This also creates the problems of having a court case in one state when one of the parties resides in another.  The courts are notoriously overcrowded so it takes time to set a court date, and by that time, witnesses may have died or moved and their present location is unknown, and even the memories of those witnesses available can fade with time. 

 

Because of the complexity of pursuing a court remedy, attorneys generally work on a contingency basis, and by the time that the case has been settled, most of the available funds have gone to the attorneys for their fees and expenses, leaving the injured party with only a fraction of the financial loss they suffered.  Obviously trial lawyers are not great proponents of No-Fault laws.

 

From a consumer viewpoint, it makes sense for their insurance company to make payment for any losses the insured suffers, regardless of who is at fault.  This reduces the number of court cases substantially, thereby reducing the court costs and attorney fees.  Courts would be less crowded and there should be more money available to pay all injured parties.

 

In order for this concept to work property, this must be considered as an “exclusive” remedy, i.e. an injured party does not get to pick-and-choose as to whether to accept the insurer’s settlement or go to court.  This means that an insured signs away some of their rights.

 

Another problem to be solved is that there are two types of losses – economic and non-economic.  Economic losses are such things as auto repair or replacement, medical costs, property repair, etc., which are factors that can be established by a dollar amount.  Non-economic losses are such items as “pain and suffering”, inconvenience, loss of consortium (services of a spouse), etc.  No-Fault does not address the non-economic losses and a person cannot sue for non-economic losses.

 

In order to keep down expenses, small losses fall outside of No-Fault legislation.  For instance, there may be a “threshold” of $500 for medical costs before the No-Fault would pay.  Some states do not use a monetary threshold, but can be limited to such things as disfigurement or dismemberment, or other injuries of this type and severity, regardless of any dollar amount.

 

Since a “pure” No-Fault law would completely eliminate any tort liability as all parties would collect from their insurers and there would be no need for either party to prove negligence, either Comparative or Contributory, there are no “pure” No-Fault states. 

 

Actual or “Modified” No-Fault laws do not eliminate liability lawsuits, but do restrict them to those cases where injuries are determined by the threshold.  Generally, lawsuits are permitted if losses exceed the minimum required by the state statutes.  For instance, the state may require $10,000 minimum for medical expense and loss of income.  If the medical expenses and/or loss of income exceeds $10,000, the injured party could sue for any amount (excess) larger than $10,000.

 

Most No-Fault plans do not cover property damage liability because property damage claims are usually considerably less than personal injury claims, are more easily determinable by dollar amount immediately, and there usually is no “pain and suffering.”  Also, since most people carry collision insurance, the repairs to their automobile are taken care of anyway so the collision insurance would eliminate the need for an insured to go to court to get their own automobile insured.

 

(How to read liability limits below:  First number is bodily injury maximum for one person involved in an accident.  Second number is bodily injury liability maximum for all injuries in one accident.  Third number is property damage liability maximum for one accident)

 

AUTO LIABILITY INSURANCE MINIMUM LEVELS OF REQUIRED

 

 

NON-STANDARD AUTOMOBILE INSURANCE

 

All states now either require that all automobiles be insured by their owners, or encourage insurance as the best and most practical way to comply with the laws (some states allow self-insurance).  Driving is a privilege awarded by the government, however the insurance companies must either decide who can or cannot drive, or offer insurance coverage to all licensed drivers.  Therefore, the insurance industry has made available insurance which is adequate to comply with any minimum-requirement compulsory insurance laws.  This is accomplished through either of two methods:

 

Substandard Automobile Insurance Companies

Certain “Specialty” insurance companies offer insurance at rate considerably higher than those offered by “standard” automobile insurance insurers.  Some of these rates may be 150% to 200% of the standard rates.  Many times the rates are a function of the number of traffic violation points and are an alternative to auto insurance policies.  While most states have “Assigned Risk Plans” (see discussion below) at times the rates charged for Assigned Risk policies are higher than those charged by a Substandard Automobile Insurance company. 

 

Assigned Risk Plans. 

Since most states have financial responsibility laws (where auto insurance is required) and/or No-fault insurance laws, insurance must be available if these laws are to work.  Therefore, special plans have been established in every state.

 

When an applicant for auto insurance has been rejected by two or more insurers, the application is then submitted to the Assigned Risk Plan Manager.  If the applicant meets the requirements of the Assigned Risk Pool, the applicant is then assigned to an insurer licensed to do business in that state.  The insurer must accept that risk and issue a policy.  Licensed insurance companies “take turns” in accepting such risks as assigned to them (hence, “Assigned Risks”). 

 

Participation can be denied only in extreme cases, such as narcotics dealers, habitual alcoholics, etc. Surcharges are assigned to the established rates, and can be as much as 200%.

 

Usually, the assignment is normally for a three-year period and at the end of that period of time the insured can return to a “standard” insurance company.  Assigned Risk policies usually provide full coverage, with a limit on the amount of liability, but some states provide only minimum limits as provided by that state’s laws.

 

Other Plans. 

There are two other plans to provide automobile insurance for those who have a difficult time purchasing it in the usual market.  These plans were devised as so many insured considered it a "social stigma” to be assigned to the Assigned Risk Pool.  The difference between the two is principally that of the methods of administration.

 

 

Joint Underwriting Associations. 

Premiums, expenses and losses of the substandard insured are pooled and shared by all of the participating insurers.  There are a limited number of servicing insurance companies for this business who adjust claims and provide all other services needed for plans of this type.

 

Reinsurance Facilities. 

Each insurer must provide coverage under this plan, for every licensed driver that applies.  If they do not meet the insurer’s underwriting criteria, the application is transferred to the reinsurance facility, and the premiums, expenses and losses are shared by all insurers who participate in the reinsurance plan. 

 

 

 

STUDY QUESTIONS

1. Contributory Negligence as it relates to Auto Insurance,
A. presently exist in all 50 states.
B. exists only in the contiguous 48 states.
C. only exists in about a dozen states.
D. is no longer in existence in the U.S.

2. When the recovery of the plaintiff is decreased by the percentage of negligence contributed to the accident by the plaintiff, this is called
A. Contributory Negligence.
B. Comparative Negligence.
C. Compulsory Negligence.
D. Partial Negligence.

3. A statute that modifies the level of care that a driver owed to a passenger in an auto, is
A. called a “Guest Statute.”
B. Comparative Modified Negligence.
C. a common-law statute.
D. a Specified Liability statute.

4. A strong argument for No-Fault insurance is that
A. consumers like the idea of their insurer to make payment for any losses the insured suffers, regardless of who is at fault.
B. contributory Negligence is too complicated and expensive.
C. the premiums are lower than those policies that are not in a No-Fault state.
D. commissions are much higher for the agent in No-Fault states.

5. There are two types of losses in insurance,
A. Monetary and Emotional.
B. No-Fault and Fault.
C. Contributory and Comparative.
D. Economic and Non-economic.

6. In a “No-Fault State”, small losses
A. are subject to a “threshold.”
B. are paid the same as large losses.
C. are paid by supplementary insurance.
D. are absorbed by the insured.

7. Most No-Fault plans do not cover
A. Personal Injury claims.
B. Property Damage claims
C. Medical Expense provisions.
D. Collision.

8. Specialty insurers that offer coverage to those that may not be able to obtain automobile insurance elsewhere, offer policies that
A. have the same premium as the “standard” policies.
B. are considerably higher than “standard” policies.
C. are considerably lower than “standard” policies.
D. only cover Personal Injury and Property Damage.

9. In most states, when an applicant for auto insurance has been rejected by two or more insurers, his application is then submitted to
A. a Specialty insurance company.
B. an Assigned Risk.
C. the Insurance Department.
D. the largest (by premium) insurer in the state.

10. When premiums, expenses and losses of the substandard insureds are pooled and shared by all of the participating insurers, this arrangement is called a
A. Reinsurance Facility.
B. Joint Underwriting Association.
C. Assigned Risk Plan.
D. Declination Pool.

 

 

ANSWERS TO STUDY QUESTIONS

 

1C     2B     3A     4A     5D     6A     7B     8B     9B     10B