Chapter 8 – Automobile Insurance and the Law:
Compensation of Accident Victims
"Neglecting to broaden their view has kept some men doing one thing all their lives." |
Introduction
Under the United States legal system, persons who are injured or incur Property Damage are entitled to compensation and damages. Both automobile insurers and society have had to deal with the problem of designing efficient compensation systems that would indemnify automobile accident victims in a fair and equitable manner. Also, as stated earlier, society has had the problem of protecting innocent victims injured by motorists who drive without insurance and cannot pay for the injuries they have caused. In Chapter Two, we discussed the Basic Components of the Law and Liability. In this chapter, we will discuss the laws and methods of compensating accident victims. Specifically, we will be looking at the following methods:
We will conclude this chapter with a look at Non-fault Automobile Insurance and Automobile Insurance for High-Risk Drivers.
Tort Liability System Based On Fault
The Tort Liability System Based on Fault is the traditional method for compensating
injured automobile accident victims in the United States. As noted before, a “tort” is a legal wrong for which the law allows a remedy in the form of money damages.
Negligence - A “tort”, or legal wrong, has great relevance for the owners or operators of automobiles. Negligence is the failure to exercise the standard of care required by law to protect others from harm. The law, in all states, requires the owners/operators of automobiles to exercise a high degree of care to protect others from harm while operating the automobile. If someone operates an automobile in a negligent manner which results in Property Damage or Bodily Injury to another person, that person can be held legally liable for the damages incurred by the injured person.
Before an injured automobile accident victim can collect damages, he/she must provide Negligence and establish fault on the part of the other driver. A small number of states, however, have Contributory Negligence Laws that make it difficult for an accident victim to collect damages. Under a Contributory Negligence Law, if a person contributes in any way to his/her own injury, that person cannot recover damages. Thus, if one driver is 20% responsible for the accident, and the other driver is 80% at fault, the first driver cannot collect any damages.
Because of the harshness of the Contributory Negligence Doctrine, most states have passed some type of Comparative Negligence Law that allows injured persons to recover damages even though they have contributed to the accident. Under a Comparative Negligence Law, if both the injured person and the other driver are negligent, the financial burden of the injury is shared by both parties according to their respective degrees of fault. Example: under one type of Comparative Negligence Law, if an insured is 20% responsible for the accident, and the driver 80% responsible, the injured can collect for his/her injury, but the damages awarded would be reduced 20%.
Although Comparative Negligence Laws are different among the states, they have a common element in that negligence on the part of the plaintiff does not necessarily bar a recovery for damages.
The dollar amount of the damages awarded to an injured accident victim depends on several factors. There are 3 types of damages that may be awarded:
1. Special Damages - Special Damages are paid for losses that can be determined documented, such as Medical Expenses, past and Future Lost Wages, Funeral Expenses and Property Damage.
3. Punitive Damages - Punitive Damages are awarded to punish people and organizations that through particularly malicious or outrageous actions cause Bodily Injury and Property Damage. Punitive Damages are payments above the Special and General Damages and are designed to prevent the persons causing the injury from repeating the same offense. To make sure that the damages are truly punitive to the person committing the offense, some states do not allow insurers to pay awards for Punitive Damages.
The Tort Liability System Based on Fault has been under heavy attacks in recent years. Critics argue that this system operates in a perverse and unquotable manner and contains numerous defects.
They feel a new system for compensating automobile accident victims is needed, such as No-Fault Automobile Insurance. No-Fault will be discussed later in this chapter.
Types of Laws
With respect to accidents, there are 2 basic types of Financial Responsibility Laws: (1) Security Type Laws and (2) Security and Proof Laws.
Financial Responsibility Laws - Many states have enacted Financial Responsibility Laws that require motorists to provide proof of financial responsibility equal to certain minimum amounts. Motorists typically are required to provide this proof under the following circumstances:
If proof of financial responsibility is not provided, both the driver's license and vehicle regulation are suspended.
Security Type Laws - Under a Security Type Law, a motorist involved in an accident involving Bodily Injury or Property Damage over a certain amount must provide proof of financial responsibility at least equal to certain minimum amounts. Proof of financial responsibility is normally provided by having Automobile Liability Insurance at least equal to certain minimum limits. Other acceptable proofs of financial responsibility are posting a bond that guarantees financial responsibility, de-positing money or securities equal to the required amounts or valid self-insurance. As noted earlier, if the motorists cannot provided proof of financial responsibility after the accident occurs, both the driver's license and vehicle registration are suspended.
Security and Proof Laws - Under this type of law, the motorist must provide proof of financial responsibility arising out of current accidents and for future accidents. States generally require proof of future financial
responsibility for three years after the accident, conviction or judgment.
Defects in Financial Responsibility Laws - Although Financial Responsibility Laws provide some protection against irresponsible motorists, critics point out the following defects:
1. most Financial Responsibility Laws only become effective after the accident, conviction or judgment. Thus, accident victims may not be compensated for their injuries if some negligent drivers are unable to pay for a judgment.
2. Financial Responsibility Laws do not guarantee payment to all accident victims. Accident victims may not be compensated if they are injured by uninsured drivers, by hit-and-run drivers, drivers of stolen cars or by someone whose license has been suspended.
3. Injured persons may not be fully indemnified for their injuries. Most Financial Responsibility Laws require only minimum amounts of Liability Insurance, which may not fully compensate the injured person.
4. There may be considerable delay in the legal system in compensating the accident victim. The delay can result in consider able financial hardship for some accident victims.
Compulsory Insurance Laws - The majority of states have enacted Compulsory Insurance Laws that must be met in order to drive legally in the state. A Compulsory Insurance Law requires the owner or operators of automobiles to Carry Automobile Liability Insurance at least equal to certain minimum limits before the vehicle can be licensed or registered. Alternatively, the motorist can post a bond, deposit cash or securities that guarantee financial responsibility in the event of an accident.
Compulsory Insurance Laws are generally considered superior to Financial Responsibility Laws since the motorist must provide proof of financial responsibility before the accident occurs. Critics of Compulsory Insurance Laws, however, argue that Compulsory Insurance Laws have serious defects. They include the following:
1. Compulsory Insurance Laws may not reduce the number of uninsured motorists. Some drivers may not license their vehicles because the insurance is too costly. Others may let the coverage lapse after the vehicle is licensed.
2. Compulsory Insurance Laws do not guarantee payment to all accident victims. Example: a hit-and-run driver may injure a person, a driver who’s insurance has lapsed, out-of-state drivers, drivers of stolen cars and fraudulently registered vehicles.
3. Insurers argue that Compulsory Insurance Laws restrict their freedom to select profitable insureds. In addition, insurers argue that needed rate increases may be denied, which results in underwriting losses.
4. Compulsory Insurance Laws provide incomplete protection. The required minimum amount of insurance may not meet the full needs of accident victims.
5. Compulsory Insurance Laws do nothing to prevent or reduce the number of automobile accidents, which is the heart of the problem.
Unsatisfied Judgment Funds - Five states (New Jersey, Maryland, Michigan, North Dakota and New York) have unsatisfied judgment funds that compensate accident victims who have exhausted all other means of payment. These funds have several characteristics.
First, the injured person must obtain a judgment against the negligent driver and show that the judgment cannot be collected. Thus, there must be an unsatisfied judgment against the negligent driver.
Second, the maximum amount paid is generally limited to the state's Financial Responsibility Law requirement. In addition, most funds reduce the amount paid by any amount collected from other collateral sources of recovery such as, payments from a Workers Compensation Law or from insurance.
Third, the negligent driver is not relieved of legal liability when the unsatisfied judgment fund makes a payment to the insured person. The negligent driver must repay the fund or lose his/her driver's license until the fund is reimbursed for the payments made.
Fourth, several methods are used to finance the benefits paid. Funds can be obtained by charging each motorist a fee, by assessing the uninsured drivers in the state, by assessing insurers based on the amount of Liability Insurance premiums written in the state.
Unsatisfied Judgments Funds have advantages and disadvantages. The major advantages are:
protection against irresponsible
motorists.
2. some drivers who are uninsured are kept off the road until the unsatisfied judgment fund is repaid.
There are four disadvantages of Unsatisfied Judgment Funds:
1. financing is inequitable, since insured motorists within the state are charged a fee.
2. amounts repaid into the funds by insured motorists are relatively small.
3. administration of the funds is often quite cumbersome and slow. As noted earlier, the injured person must show that a judgment cannot be collected.
4. the funds have experienced serious financial problems in the past.
Uninsured Motorists Coverage - The Under-Insured Motorists Coverage can be added to an Automobile Insurance Policy to provide complete protection. The Under-Insured Motorists Coverage applies when the negligent driver has Liability Insurance at the time of the accident but the limits carried are less than the limits provided by the Under-Insured Motorists Coverage.
Example: Assume that Terry has Under-Insured Motorists Coverage in the amount of $100,000 and is injured by a negligent driver who has Bodily Injury Limits of $25,000/ $50,000, which satisfies the state's Financial Responsibility Law requirement. If Terry's actual damages are $75,000, he would recover a maximum of $25,000 from the negligent driver's insurer since that is the applicable Limit of Liability. He would receive an additional $50,000 from his own insurer from the Under-Insured Motorists Coverage.
The Under-Insured Motorists Coverage should not be confused with the Uninsured Motorists Coverage. They do not overlap or duplicate each other. An insured can collect under one coverage or the other, depending on the situation but not both. As stated earlier, the Uninsured Motorists Coverage applies when the bodily injury is caused by an uninsured motorist, a hit-and-run driver or by a driver whose insurer is insolvent. In contrast, the Under-Insured Motorists Coverage applies only when the other driver Has Liability Insurance but the liability limits carried by the negligent driver are less than the limits provided by the insured's Under-Insured Motorists Coverage.
Finally, the Under-Insured Motorists Coverage can be written only if certain conditions are satisfied:
No-Fault Automobile Insurance
No-Fault Automobile Insurance is another approach for compensating automobile accident victims. As of 1993, there were 27 states that had some form of No-Fault Automobile Insurance Law in operation. We look at the states and their coverage at the end of the chapter.
Meaning of No-Fault
No-Fault Insurance means that in the event of an automobile accident, each party collects from his/her own insurer regardless of fault. It is not necessary to establish fault and prove negligence in order to collect.
In addition, a pure No-Fault Law places some restrictions on the Right-to-Sue the negligent driver who caused the accident. If a claim is below a certain monetary threshold (such as $1,000), an insured person has the Right-to-Sue the negligent driver who caused the accident. A small number of states with No-Fault Laws use a “verbal threshold" rather than a monetary threshold. A “verbal threshold” means a lawsuit for damages is allowed only in serious accidents, such as those involving death, disfigurement or dismemberment. Persons with less serious injuries cannot sue at all but must collect from their own insurers.
Types of No-Fault Laws
Three types of No-Fault Laws have been proposed in the various states:
1. Pure No-Fault Laws
2. Add-On Plans
3. Modified No-Fault Laws
Pure No-Fault Laws - Under a Pure No-Fault Law, the injured person cannot sue at all for damages regardless of the severity of the injury. In effect, the Tort Liability for Bodily Injury would be abolished since the injured person cannot sue for damages. Instead, the injured person would collect certain No-Fault Benefits (discussed later) from his/her insurer. No state has enacted a Pure No-Fault Law at this time.
Add-On Plans - Add-On Plans pay certain benefits to injured automobile victims without regard to fault but the injured person retains the Right-to-Sue the negligent person who caused the accident. This explains the named “Add-On”. The law adds benefits but takes nothing away. Add-On Plans are generally not regarded as pure No-Fault Laws since the injured person retains the Right-to-Sue. As noted earlier, a pure No-Fault Law must place some restrictions on the Right-to-Sue for damages.
Modified No-Fault Laws - Under a Modified No-Fault Law, injured persons are permitted to sue only if the claim exceeds the monetary or verbal threshold. If the claim were below the threshold, the injured person would collect certain benefits from his/her own insurer. Thus, Modified No-Fault Laws partially restrict the Right-to-Sue but do not completely eliminate it.
Characteristics of No-Fault Laws
Although the No-Fault Laws vary widely with respect to details, certain characteristics are common to all laws.
No-Fault Benefits
No-Fault Benefits are provided by adding an endorsement to an Automobile Insurance Policy. The Endorsement typically is called Personal Injury Protection (PIP) and describes the No-Fault Benefits that are paid. No-Fault Benefits are limited to the injured person's actual economic loss, which includes the payment of medical expenses, a percentage of lost wages and certain other expenses. The injured can sue for non-economic loss factors that are not measurable in dollars (such as pain and suffering, inconvenience and mental anguish) only when the monetary threshold limit is exceeded or the verbal threshold is met. The following No-Fault Benefits are typically provided:
1. Medical Expenses - medical expenses are paid up to a maximum limit, however, the laws in Michigan and New Jersey provide for Unlimited Medical Expenses.
3. Loss of Earnings - proportion of the insured person's lost earnings is also paid. There is usually a maximum limit in terms of amount and time. Example: an injured accident victim may receive a maximum benefit equal to 80% of the lost wages up to $1,000 monthly for 3 years.
4. Expenses for Essential Service - Benefits are paid for expenses incurred for certain essential services but are ordinarily performed by the injured person, i.e., home work, house repairs and lawn mowing.
5. Funeral Expenses - Benefits for funeral expenses are paid to some limit. In some states, the funeral benefit is part of the Medical Expense Limit. In other states, payment for funeral expenses is a separate benefit.
6. Survivors' Loss Benefits - Benefits can be paid to certain survivors to compensate them for the death of a covered automobile accident victim. The benefits paid are periodic income payments that partially compensate the survivors for the death of a covered person. Some states require that higher optional No-Fault Benefits should be made available to persons who want benefits above the prescribed minimums. In addition, some states also require companies to provide higher optional deductibles that can be used to reduce or eliminate certain No-Fault Benefits.
Right-to-Sue
The Right-to-Sue depends on the type of No-Fault Law. A minority of states currently has Add-On Plans. In these states, there is no restriction on the Right-to-Sue.
The majority of states with No-Fault Laws have enacted modified No-Fault Laws. As
noted earlier, if the Bodily Injury is below the monetary threshold or does not meet the verbal threshold, the injured person is not allowed to sue for damages but will receive No-Fault Benefits from his/her own insurer. If the injury exceeds the threshold, the injured person has the option of continuing to receive the No-Fault Benefits or sue for damages under the Tort Liability System. No-Fault Laws typically allow the insurer to subrogate against the negligent motorists' insurer to the extent that No-Fault Benefits are paid, or they allow the insurer to be reimbursed for the No-Fault Benefits paid if there is a Tort Liability recovery from a third party.
There are states that allow the following options: (1) coverage under the State's No-Fault Law with a verbal threshold and lower rates, or (2) retention of the Right-to-Sue for any auto-related injury with higher rates. If the No-fault Option were elected, an injured motorist would not be allowed to sue unless the injury appeared on the injury list described in the verbal threshold; rates are lower if this option is elected. If the second option is elected, an insured motorist could sue for any auto-related injury but higher rates are charged.
Exclusion of Property Damage
No-Fault Laws apply only to Bodily Injury and not to Property Damage. Thus, if a person's property is damaged by a negligent motorist, that person has the Right-to-Sue for damages. Property Damage generally is excluded from No-Fault Laws for several reasons:
The states have not found it necessary to extend No-fault Coverage to Property Damage.
Evaluation of No-Fault Laws
This section presents arguments that No-Fault favors Automobile Insurance Laws, as well as, arguments that oppose such laws. This section also includes an evaluation of the effectiveness of No-Fault Laws.
Arguments for No-Fault Laws
2. Inequities in Claim Payments - It is argued that the present Tort Liability System is marred by inequities in claim payments. Under the present system, small claims may be overpaid while serious claims may be underpaid. A Department of Transportation Study showed that for a group of smaller claims of $500 or less, the actual settlement was 4.5 times the actual economic loss. In contrast, for automobile victims with an economic loss of $25,000 or more, only about 1/3 of the economic loss was recovered.
3. Limited Scope of Present Reparation System - It is also argued that many injured persons do not collect under the present system. The Department of Transportation Study shows that only 45% of the seriously injured or the beneficiaries of those killed benefited from the Tort Liability System. One out of ten accident victims received no compensation from any one source.
4. Large Proportion of Premium Dollar Used for Legal Costs - It is also argued under the Tort Liability System, that a large proportion of the premium dollars is used to pay attorneys, claim investigators and other costs of fixing blame. The Department of Transportation Study showed that for each dollar of Liability Insurance premiums collected $.23 was used to pay defense attorneys, plaintiff’s attorneys, claim investigation and other claim costs. Only $.44 was paid to automobile accident victims.
5. Delay in Payment - The Department of Transportation Study found that only half of the claims were settled in 6 months or less. Persons who were seriously injured or their survivors had to wait an average of 16 months for final payment from Automobile Liability Insurance.
Special Note: The United States Department of Transportation Study used in the above arguments was "Major Vehicle Crash Losses and Their Compensate in the United States, a Report to Congress and the President" (Washington, D.C. Government Printing Office).
Arguments against No-Fault Laws
Supporters of the present Tort Liability System, however, present persuasive arguments against No-Fault Laws.
1. Defects of the present Tort Liability System are exaggerated - It is argued that the present system is working reasonably well since most automobile claims are settled out of court.
2. Claims of premium savings and greater efficiency are overstated. It is argued those assertions of premium savings and greater efficiency under No-Fault Laws is exaggerated and unreliable. Under some federal No-Fault proposals, automobile premiums would go up and not down.
3. Safe drivers may be penalized - It is argued that the rating system used would inequitably allocate the accident costs to the drivers who are not responsible for the accidents. Thus, their premiums may go up as a result.
4. There is no payment for pain and suffering - No-Fault Benefits do not include any payment for pain and suffering. Attorneys representing injured automobile victims argue that the dollar amount of medical expenses and lost wages does not always represent the true economic loss to the victim since pain and suffering should also be considered.
5. Court delays are not universal - It is argued those court delays and clogged courts are not universal but exist only in certain metropolitan areas. Thus, court delay should be viewed as a separate problem and should be attached as such rather than used as an argument for a No-Fault Law.
6. Present system needs reform - Sup-porters of the present Tort Liability System argues that the system only needs to be reformed and not replaced with No-Fault Law. This could be done by increasing the number of courts and judges, limiting contingency fees of attorneys, using arbitration panels rather than the courts in settling claims and initiating other reforms.
Results of No-Fault Laws
Although problems have arisen with the No-Fault Laws enacted in some states, research studies indicate that properly designed No-Fault Laws are working reasonably well. The All Industry Research Advisory Committee (AIRAC) analyzed some 46,000 claims that were closed in 1992 to determine the effectiveness of No-Fault Laws. The AIRAC study compared claim costs in states that operated under the traditional Tort Liability System with claim costs in states that have enacted No-Fault Laws. The major conclusions are summarized as follows:
1. There is less incentive to exaggerate injuries in no-fault states - Data shows that tort states provide an incentive to exaggerate injuries in order to obtain a higher award for pain and suffering. No-Fault states provide no such incentive.
2. The percentage of total compensation paid to claimants for medical bills and lost wages is higher in No-Fault States - The AIRAC study showed that 78% of all payments in No-Fault states is used to pay medical bills and lost wages. The remainder is paid for pain and suffering. In contrast, only 46% of the dollars received by accident in Tort states is used to pay medical bills or to replace lost income; more than half of the total payments in Tort states went for pain and suffering.
3. Accident victims are paid more quickly in No-Fault States - In No-Fault States, 72% of the accident victims with medical bills and lost wages in excess of $2,500 received their first payment within 90 days; the corresponding figure for the Tort states is only 10%.
4. No-Fault tends to compensate more people - In No-Fault states, 16% of the claimants were individuals who were involved in accidents in which no other car was involved; the corresponding figure in the Tort states was only 3%.
5. No-Fault States with verbal threshold or with high monetary thresholds can be effective in holding down claim costs - The AIRAC Study compared insurance costs under No-Fault with an estimate of what the insurance costs would have been if the Tort Liability System had not been replaced. The study showed those states with a monetary threshold of $1,000 or more realized greater cost savings than the Add-On states or states with thresholds under $1,000.
Some No-Fault Laws, however, have serious defects. One major defect is the low-dollar threshold in many states. Critics argue that the low-dollar threshold on medical expenses in many states are too low to discourage lawsuits and that, as a result, a large number of minor cases end up in the courts. To reduce the number of Bodily Injury Claims in states with weak No-Fault Law, critics recommend higher monetary thresholds or the enactment of a verbal threshold. As noted earlier, a verbal threshold means that a lawsuit for damages is permitted only in serious cases such as: death, disfigurement or dismemberment. A properly worked verbal threshold has considerable potential for holding down bodily claim costs.
Automobile Insurance for High-Risk Drivers: The Shared Market
High-Risk Drivers frequently have difficulty obtaining automobile insurance in the standard markets. These drivers can obtain Automobile Insurance in the Shared Market. The Shared Market refers to plans in which automobile insurers participate to make coverage available to drivers who cannot obtain coverage in the standard market. Several plans are specifically designed for High-Risk Drivers:
Automobile Insurance Plan - Most states have an Automobile Insurance Plan (formerly called Assigned Risk Plan) for High-Risk Drivers who cannot obtain automobile insurance in the standard markets.
Under this arrangement, all automobile insurers doing business in the state are assigned their proportionate share of High-Risk Drivers based on the total volume of automobile business written in the state. Example: if one insurer writes 5% of the automobile business in the state, it would be assigned 5% of the High-Risk Drivers.
Although Automobile Insurance Plans vary from state to state, they have several common characteristics.
The amount of Liability Insurance that can be obtained is at least equal to the states Financial Responsibility or Compulsory Insurance requirement. Most plans make higher limits available on an optional basis. Most plans also make available Medical Payments Coverage and Physical Damage Insurance.
Certain persons may be ineligible for coverage. Example: persons convicted of a felony within the preceding 36 months, persons engaged in illegal activities such as drugs and gambling, and persons who are habitual violators of state and local laws may be ineligible for coverage.
In addition, the premiums paid are substantially higher than the premiums paid in the standard markets. High-Risk Drivers are rated on the basis of their driving records and are not charged accordingly. Also, drivers do not have a choice of insurers. As noted earlier, automobile insurers in the states are assigned their proportionate share of High-Risk Drivers based on total volume of automobile business written in the state.
Finally, an insurer is not required to insure a High-Risk Driver for more than 3 years. The Automobile Insurance can be cancelled under certain conditions such as: obtaining the insurance through fraud or misrepresentation or for non-payment of premiums.
Automobile plans have advantages and disadvantages. The major advantage is that High-Risk Drivers have at least one source of obtaining Liability Insurance to meet the state's Financial Responsibility or Compulsory Insurance requirement.
The major disadvantages are:
1. Substantial Underwriting Losses - Despite substantially higher premiums, the Automobile Insurance Plans have experienced heavy underwriting losses. The result is that good drivers in the voluntary standard market are heavily subsidizing High-Risk Drivers who are insured in Automobile Insurance Plans.
2. Uninsured High Risk Drivers - High premiums may force many High-Risk Drivers to go uninsured, which defeats the basic purpose of Automobile Insurance Plans.
3. Lacks of Choice of Companies – Drivers are not permitted to select their own company, which restricts freedom of choice.
4. Clean Risks - Some drivers with clean driving records and no driving convictions are arbitrarily placed in Automobile Insurance Plans. This can happen when poor loss experience or inadequate rates force insurer to stop providing coverage in a given territory.
Joint Underwriting Association - A small number of states have Established Joint Underwriting Associations that make Automobile Insurance available to High-Risk Drivers. A Joint Underwriting Association (JUA) is an association of automobile insurers in which high-risk automobile business is placed in a common pool and each company doing business in the state pays its proportionate share of pool losses and expenses.
Under the arrangement, the JUA dictates the auto insurance forms to be used by High-Risk Motorists and sets the rates. A limited number of companies are designated as Servicing Insurers to service the high-risk business. The Servicing Insurer receives the application, issues the policy, collects the premiums, pays claims and provides other necessary services. All Automobile Insurers in the state pay their proportionate share of underwriting losses and expenses based on the company's share of Voluntary Automobile Insurance written in the state.
Supporters of JUA's maintain that they have certain advantages over Automobile Insurance Plans:
1. Less Stigma to High-Risk Drivers - Proponents claim the stigma associated with a Shared Marked Plan is less under a JUA than under an automobile insurance plan.
2. Fairer Method of Paying Losses - It is argued that a JUA is a fairer method of paying losses since companies are proportionately sharing dollar losses rather than the number of drivers.
Reinsurance Facility - A small number of states have enacted laws to establish a special Reinsurance Facility for High-Risk Drivers. Under this arrangement, the insurer underwrites the application for insurance, issues the policy and receives the premiums. However, if an applicant for automobile insurance is considered a High-Risk Driver, the insurer has the option of placing the driver in the Reinsurance Facility. Any underwriting losses in the Reinsurance Facility are then shared by all automobile insurers doing business in the state. Although the High-Risk Driver is in the Reinsurance Facility, the original insurer pays and claims and continues to service the policy. A Reinsurance Facility has several advantages as a shared market plan for High-Risk Drivers.
1. High-Risk Drivers are not aware of transfer to a Reinsurance Facility - Thus, the stigma of being placed in an Assigned Risk Plan for poor drivers is avoided.
2. Rate Discrimination is reduced - The original insurer writing the High-Risk Driver applies the same rates and classification plan to all of its policy owners.
3. Coverage discrimination is reduced - Insurers use the same policy forms and endorsements that are generally required and desired by customers in the same class.
4. Delays in service and service deficiencies are reduced - Agents are able to provide the same service to all policy owners including High-Risk Drivers.
The major disadvantage of reinsurance facilities is that they have experienced substantial underwriting losses. As a result, good drivers in the standard markets are heavily subsidizing the High-Risk Drivers in Reinsurance Facilities.
Specialty Insurers - In addition to three Shared Market Plans, High-Risk Drivers may be able to obtain Automobile Insurance from certain private insurers who specialize in insuring motorists with poor driving records. These specialty companies typically insure drivers who had been cancelled or refused insurance, drunk drivers, teenage drivers and other High-Risk Drivers.
Automobile Insurance Contracts from Specialty Insurers on High-Risk Drivers generally have several common features.
First, the premium charges are substantially higher than premiums charged in the standard market. It is not uncommon for High-Risk Drivers to pay 3-4 times the premiums charged in the standard markets. The actual premiums are based on the individual's driving records. The higher the number of traffic violations and chargeable accidents, the higher the premium that must be paid.
Second, the amount of Liability that can be obtained from Specially Insurers is at least equal to the State's Financial or Compulsory Insurance Law. Many Specialty Insurers offer higher limits on an optional basis.
Third, because High-Risk Drivers have a greater probability of being involved in another accident, Medical Payments Coverage may be limited and Collision Insurance may be available only with a higher deductible. Example: the Collision deductible may be $250 or higher.
Fourth, many insurers have Safe Driver Incentive Plans to encourage High-Risk Drivers to drive in a responsible manner. Under these plans, premiums are periodically reduced if the High-Risk Driver has no chargeable offenses, however, the High-Risk Driver is surcharged and must pay higher premiums if another chargeable accident or traffic violation occurs during the policy period.
Summary
Traditionally, persons injured in auto accidents through the Negligence of others have relied on the Tort Liability System to collect damages. In an effort to ensure that negligent drivers carry insurance to pay for such damages, various states have enacted Financial Responsibility Laws and Compulsory Insurance Laws. Some states have established Unsatisfied Judgment Funds to provide compensation for auto accident victims. Uninsured and Under-Insured Motorists Coverages carried by the injured individuals also are sources of recovery for some accident costs caused by negligent drivers.
In contrast to these traditional approaches to compensating auto accident victims, 26 states have Enacted No-Fault Auto Insurance Laws. Under No-Fault Insurance, each injured party in an automobile accident collects from his/her own insurance regardless of fault. Under a No-Fault Add-On Plan, there is no restriction on the Right-to-Sue. Under a modified No-Fault Plan, an injured victim can sue only if the monetary threshold is exceeded or the verbal threshold is met.
The Personal Injury Protection (PIP) Endorsement adds No-Fault coverage to the Personal Auto Policy. Benefits are paid, as specified in the law of the insured's state, for economic losses, such as medical expenses and loss of earnings resulting from Bodily Injury to the insured. Non-Economic Losses such as: pain, suffering, inconvenience and mental anguish are not paid under the PIP Endorsement. However, all of the No-Fault Laws currently in effect allow for recovery of Non-Economic Losses from the negligent party after a monetary or verbal threshold is exceeded.
Several types of Shared or Residual Automobile Insurance Market Plans are available in the various states. The most common form of Shared Market Plan is the Automobile Insurance Plan. In addition, a small number of states have a Joint Underwriting Association (JUA) for High-Risk Drivers. A few states have a Reinsurance Facility that allows the insurer of a High-Risk Driver to reinsure the business in a Reinsurance Facility supported by all auto insurers in the state.
Summary of the State No-Fault Systems
The following current analysis of state No-Fault Laws have been prepared by the editors of the Policy, Form & Manual Analysis Service, published by Rough Notes Co. It is important to bear in mind that the entire picture of No-Fault is in a state of flux.
Arkansas - The purchase of insurance is optional under the Arkansas Automobile Law. A provision is made for $5,000 per person medical benefits, including hospital, and $7,280 loss of income benefits (70% of lost wages up to $140 per week, beginning 8 days after the accident for up to 52 weeks). Essential services are covered up to $70 per week, up to 52 weeks, with an 8-day waiting period and there is a $5,000 death benefit. Vehicle damage is under the Tort System. Effective June 30,1987, Liability Insurance of $25,000/$50,000/$15,000 is compulsory.
Colorado - The law makes allowance for $50,000 for Medical Expenses and $50,000 for Rehabilitation. Lost income benefits are limited to 52 weeks and are 100% of the first $125 per week, 70% of the next $125 and 60% of the remainder up to $400 per week. Payment is made for essential services up to $25 per day up to 52 weeks. There is a $1,000 death benefit. General Damages are recoverable by way of lawsuit when the expenses of Medical and Rehabilitation Services are more than $2,500 or injury causes permanent disfigurement, permanent disability, dismemberment, loss of earnings for more than 52 weeks, or death.
Connecticut - The Connecticut Plan is a limited First Party No-Fault Personal Injury system for private passenger cars. It is compulsory and makes provisions for subrogation and reimbursement.
The maximum payment under the Basic Plan is $5,000 per person per accident. Benefits include: medical and hospital expenses, wage loss, substitute service and survivor's benefits up to 80% of actual loss, subject to $200 weekly limit and up to $2,000 funeral expenses. Benefits are payable as accrued. Those unpaid within 15 working days after receipt of proof of loss bear interests at 12%. Tort action is barred unless medical or hospital expenses exceed $400, or unless injury consists of a fracture, disfigurement, permanent injury or death, loss of a body member or any bodily function.
Covered persons include the owner of a private passenger motor vehicle, a relative of the owner residing in the same household and minors in custody of such owner or relative who live in the same household, while occupying any private passenger motor vehicle or while a pedestrian injured by physical contact with a motor vehicle of any type. Other covered persons include individuals occupying the owner's private passenger motor vehicle, unless they are private passengers auto owners and pedestrians injured by physical contact, except outside of Connecticut.
Delaware - The Delaware Plan is a combination of First Party No-Fault and Third Party Liability ($40,000). The program is compulsory for owners of motor vehicles registered in Delaware (except approved self-insureds), with additional coverages optional and provides for subrogation.
Benefits under the basic plan on a First Party No-Fault basis include: up to $15,000 per person $30,000 aggregate for medical expenses, wage loss and extra expense for personal services, with a sub-limit of $3,000 for funeral expenses and $5,000 damages to non-automotive property. Deductibles are permitted for claims by the insured and members of his household.
There is no limitation on the Right-to-Sue. However, the amount of No-Fault Benefits received can't be used as evidence in suits for General Damages. The insurer has subrogation rights to the amount of compensation benefits paid. Vehicle Damages remains under the Tort System.
District of Columbia - The District of Columbia Compulsory No-Fault Motor Vehicle Act of 1982 was discontinued effective June 3, 1986 and replaced with an optional plan. Motorists have the option of choosing one of a series of Medical and Rehabilitation Benefit limits up to $100,000, Work Loss Benefits limits up to $24,000 and Funeral Benefits up to $4,000. Or they can choose not to buy Personal Injury Protection (PIP) coverage and if injured in a traffic accident, the injured has 60 days to decide whether he or she wants to receive PIP benefits.
Injured persons who choose to receive PIP benefits cannot collect Liability Damages from an At-Fault Driver unless the victim is disabled more than 180 days, has other substantial or permanent injuries as defined in the law, or has medical expenses or work loss in excess of the amount of available PIP benefits. Vehicle Damage remains under the Tort System.
Florida - Under the Automobile Reparations Reform Act, motorists are required to carry First Party Personal Injury Protection (PIP) Insurance Coverage with an overall per person limit of $10,000. Within that limit, the mandatory coverage pays 80% of medical costs, 60% of lost income, replacement services and funeral costs up to $1,750. Deductibles from $250 to $2,000 are available. Recovery of damages for pain and suffering is not permitted unless injury results in significant and permanent loss of important body function, permanent injury, significant and permanent scarring, disfigurement or death.
All motor vehicles (as defined in the law) with four or more wheels except mobile homes, taxicabs and limousines are covered by the law, which also applies to out-of-state vehicle owners who have their vehicles in Florida for more than 90 days a year.
Vehicle Damage remains under the Tort System. The Florida Supreme Court declared unconstitutional the original Property Damage tort exemption provisions of the Florida No-Fault Law. The court said the legislature had not presented a case showing public necessity for abolition of the Right-to-Sue for recovery of Property Damage loss. It observed that a reasonable alternative to an action in Tort had not been provided.
Georgia - The Georgia Law makes provisions for an aggregate No-Fault Benefit limit of $5,000. The various benefits related to bodily injury only include: up to $2,500 for medical costs, 85% of lost income with a maximum of $200 per week, $20 per day for necessary services, survivor's benefits the same as lost income benefits if the victim had lived, and a $1,500 funeral benefit.
An injured person can sue in Tort if medical costs exceed $500, disability lasts 10 days, injury results in death, fractured bone, permanent disfigurement, dismemberment, permanent loss of body function, permanent/partial or total loss of sight or hearing. Vehicle damage remains under the Tort System.
Subrogation rights may be pursued only after the insured has been completely compensated for all economic losses. Liability Insurance of $10,000/$20,000/$5,000 limits is required.
Hawaii - The Hawaii Law establishes an aggregate limit of $15,000 per person applicable to: medical and hospital services (including non-medical remedial care and treatment rendered in accordance with the teachings, faith and belief of any group which depends for healing upon spiritual means through prayer); rehabilitation, occupational, psychiatric and physical therapy, up to $900 monthly for income loss, substitute services and survivor's loss, and up to $1,500 for funeral expenses. Medical and Wage Loss Benefits are not payable to public assistance recipients receiving free insurance. Liability Coverage with limits of $35,000 B.I. and $10,000 P.D. per accident is required.
An injured person can bring suit in Tort if Medical and Rehabilitation Expenses exceed a floating threshold established annually by the insurance commissioner. Lawsuits may also be filed if injury results in death, significant loss of use of body part or function, or permanent and serious disfigurement that subjects the injured person to mental or emotional suffering. Vehicle damage remains under the Tort System.
Kansas - The present Kansas No-Fault Law applies to residents and also requires that insurers of out-of-state motorists using Kansas highways certify that Liability Policies issued to such motorists will provide Kansas First-Party Benefits. Such benefits, applicable to Bodily Injury only, include up to $4,500 per person for medical expenses, $4,500 rehabilitation, $10,800 loss of income ($900 maximum per month for one year, $9125 substitute services [$25 per day for 365 days], $2,000 funeral benefit and a maximum of $19,925 Survivors' Benefits [minus any disability benefits the victim received before death]).
Kentucky - The Kentucky Law establishes an Aggregate No-Fault Benefit limit of $10,000 which covers: medical expense, funeral expense up to $100, income loss up to $200 a week, with as much as 15% deducted for income tax savings, up to $200 a week each for replacement service loss, survivors' economic loss and survivors’ re-placement services loss. A motorist has the right to reject No-Fault.
An injured person cannot recover in Tort unless medical expenses exceed $1,000 or injury results in permanent disfigurement, fracture of a weight-bearing bone, a compound, comminuted, displaced or compressed fracture, loss of a body member, permanent injury, permanent loss of a body function or death. The limitation does not apply to those who reject the No-Fault System nor to those injured by a driver who has rejected it. Neither does it apply to motorcycle passengers. Vehicle Damage remains under the Tort System.
Maryland - The Maryland requirement provides that every owner of a motor vehicle required to be registered in the state must carry "Primary Coverage for Economic Loss". The coverage (which may be excluded for taxicabs and mopeds) provides medical, hospital and disability benefits up to $2,500 for expenses, loss of income and, where there is no loss of income, reimbursement for necessary expenses for essential services incurred within three years from the date of the accident. There is no restriction on the Right-to-Sue. Insurers are required to offer Collision Coverage for damage to insured motor vehicles, subject to deductibles of $50 to $250 in $50 increments. Vehicle damage remains under the Tort System.
Massachusetts - Benefits under the Basic Plan include reasonable and necessary medical and hospital expenses and up to 75% of wage loss and substitute service expenses as a result of bodily injury, subject to a total amount of $2,000 per person. Benefits are payable as accrued.
Tort action is permitted if hospital and medical expenses exceed $500 or in case of death, dismemberment, loss of sight or hearing, serious disfigurement or fracture. Covered persons include the named insured, members of his household, occupants of the insured vehicle and pedestrians.
Michigan - The Michigan Law bars motorists in the state from recovering for General Damages unless the accident victim's injuries result in death, serious impairment of body function or permanent serious disfigurement. It also provides that they cannot recover Vehicle Damage Loss from another Michigan driver, regardless of fault except when the damage is less than $400 and is not covered by insurance. Motorists are required to buy Personal Protection and Property Protection Coverages.
Personal Protection Coverage provides payment, without regard to fault, of: medical and hospital expenses unlimited as to time or amount (except that hospital room charge must be equal to semi-private room charge), and $1,000 funeral expense. Lost Wage Benefits and Substitute Services, adjusted annually by the insurance commissioner to reflect changes in the cost of living, both payable to the accident victim or survivor for up to three years.
A motorist may elect to make other Health or Accident Insurance primary, with consequent Personal Protection Coverage rate reduction and coverage modifications applicable only to the names insured, spouse and relatives living in the household.
Property Protection Coverage provides for payment of up to $1 million for damage to tangible property other than vehicles and their contents. The coverage does, however, pay for damage to vehicles that are properly parked. Several Collision Coverage options are available.
Minnesota - The Minnesota No-Fault Automobile Act requires all owners of motor vehicles with four or more wheels to buy prescribed coverages for economic loss in a $40,000 benefit package. They include benefits up to $20,000 per person for Medical and Rehabilitative Expenses. Also included is up to $20,000 for other benefits, including 85% of lost income up to $250 weekly, $200 per week for replacement services, with a 8-day waiting period, up to $200 weekly in survivors' economic benefits, up to $250 weekly for Survivor's Replacement Service Loss and $2,000 for funeral benefits.
An injured person cannot recover General Damages through legal proceedings unless his medical expenses (excluding diagnostic x-rays and rehabilitation) exceed $4,000, or he has 60 days or more of disability, or injury results in permanent disfigurement, permanent injury or death. Vehicle Damage remains under the Tort System. Liability Coverage with $30,000/$10,000 limits and Uninsured Motorists Coverage with $2,550 limits is required.
Nevada - The Nevada's legislature voted to repeal the state's No-Fault Auto Insurance Law, effective January 1, 1980.
New Hampshire - The Law makes provisions for First Party Medical Benefits of $1,000 if expenses are incurred within one year. Any occupant of a secured vehicle is entitled to the benefits in and out of state. The law excludes fleet and commercial vehicles, large trucks, mopeds, motorcycles and persons with equivalent medical coverage.
New Jersey - The New Jersey Law requires each motorist to select one of two Tort Limitations in writing. Owners of autos, except commercial vehicles, large trucks, motorcycles and mopeds, are required to buy insurance that provides the following benefits without regard to fault, subject to the Selected Tort Limitation Option:
Unlimited benefits for medical and hospital costs (but companies may recover from an Unsatisfied Claim and Judgment Fund amounts they pay out in excess of $75,000), wage loss up to $100 a week for one year, substitute services up to $12 per day for a maximum of $44,380 per person, funeral expenses of $1,000, survivor's benefits equal to an amount a victim would have received if he or she had not died.
A motorist may elect to exclude all benefits except medical and hospital. Medical Coverage may be bought with a deductible of $500, $1,000, or $2,500 per accident but this deductible applies only to the Named Insured and his relatives.
Covered persons include the named insured, resident members of his or her family, other persons occupying the auto of the named insured, persons using the auto with the insured's permission and pedestrians.
New York - An accident victim covered by No-Fault cannot recover General Damages from a driver covered by No-Fault unless the victim's injury results in: the victim being unable to perform substantially all of the material acts that constitute his usual daily activities for at least 90 days during the 180 days following the accident, dismemberment, significant disfigurement, a fracture, permanent loss of use of a body organ, member, function or system, permanent consequential limitation of use of a body organ/member, significant limitation of use of a body function or system, death, loss of a fetus.
The law provides for an Economic Compensation Package of up to $50,000 (aggregate per person limit) for medical expenses of loss of income, the latter to be paid at the rate of 80% of salary up to a maximum benefit of $1,000 (80% of $1,250) a month for three years. Substitute Service Benefits are payable in a limit of $25 a day for up to one year. In addition to the Economic Loss Package, the estates of accident victims who die are paid $2,000 by the insurer.
North Dakota - The North Dakota law makes provisions for No-Fault Benefits with an overall limit of $30,000 per person, including: coverage for Medical and Rehabilitation Costs, up to $150 a week for income loss (limited to 85% of actual income), up to $15 a day for replacement service, up to $150 a week for Survivors Income Loss, up to $15 a day for Survivors' Replacement Service Loss, and up to $1,000 for funeral expenses.
Insured persons are exempt from liability for General Damages unless the victim has more than $2,500 in medical expenses, is disabled more than 60 days, receives serious and permanent disfigurement, is dismembered or dies. Victims can sue to recover economic loss not compensated by the No-Fault Coverage. Vehicle Damage remains under the Tort System.
Oregon - The Oregon statute, established Limited First Party Payments for Personal Injury without regard to fault. Coverage is mandatory in Liability Policies applicable to private passenger motor vehicles other than motorcycles and mopeds. Benefits under the basic plan are as follows: up to $10,000 for medical benefits, 70% of lost wages up to $1,250 per month, $30 per day substitute services, $15 per day for child care (subject to $450 maximum). Wage Losses and Reimbursement for Substitute Services are paid from the first day of disability if it lasts 14 days or more (subject to a maximum payment period in the aggregate of 52 weeks).
There is no restriction on Tort action for injury. An insurer of a motor vehicle, if its insured would be legally liable, must reimburse other insurers for benefits paid under the law, provided other insurers are entitled to reimbursement by the terms of their contract. Vehicle Damage stays under the Tort System. Covered persons include the insured, members of his family residing in the same household, guest passengers and pedestrians.
Pennsylvania - Pennsylvania motorists are provided with the freedom to choose between two Tort options affecting recovery following motor vehicle accidents.
The first option provides a Full-Tort Alternative. Motorists who choose this option are allowed to seek compensation in the courts for Economic and Non-Economic Loss. The second option provides a Limited Tort Alternative. Motorists who choose this option are allowed to seek compensation in the courts for economic loss but can only seek compensation for non-economic loss when a "serious" injury is sustained. Serious injuries, as defined in the law, include serious impairment of a body function, permanent serious disfigurement, and death. In addition, a Tort Action may be instituted to Recover Non-Economic Loss if the At-Fault Driver was driving under the influence of alcohol or a controlled substance, driving a vehicle licensed in another state, intended to injure himself or another, had not retained the financial responsibility ($15/30/5,000) required by Pennsylvania law.
Auto insurers in Pennsylvania are required to offer the following coverages: Medical and Rehabilitation Benefits up to $100,000, income benefits (subject to 80% of gross income) up to $2,500 per month to a maximum of $50,000, accidental death benefit of $25,000 and a funeral benefit of $2,500. These benefits provide a total aggregate of $177,500, a medical benefit of $1,100,000 is available.
Puerto Rico - The Puerto Rico Social Protection Plan is a Compulsory First Party No-Fault System for Personal Injury administered by the government.
Benefits include: unlimited services in Government hospitals and funeral allowance of $500; 50% of salary up to $100 a week during the first year and $50 a week during the second year, survivors' benefits of $10,000 of primary dependent, $1,000 for each secondary dependent and additional benefits for children. Provisions are made for payment of benefits weekly. Lawsuits are permitted when losses exceed $1,000 for pain and suffering and $2,000 for other damages involving economic loss.
South Carolina - The South Carolina Law establishes an aggregate limit of $1,000, covering medical and funeral costs, loss of earnings and loss of essential services. There are no limitations on General Damages so those lawsuits may be initiated without regard to severity of injury. Vehicle Damage remains under the Tort System. Purchase of insurance is optional.
South Dakota - The South Dakota Statute requires that optional No-Fault Supplemental Coverages be made available to the named insured in any Automobile Liability Policy renewed, issued or delivered, covering any four-wheel passenger automobile registered or principally garaged in South Dakota.
An insured may elect to carry any, all or none of the option coverages. Medical Expenses Coverage is available in a minimum amount of $42,000, Accidental Death Benefit Coverage carries a $10,000 limit, Total Disability Coverage pays weekly indemnity beyond 14 days of $60 per week for 52 weeks ($30 for a person not gainfully employed at the time of an accident).
The named insured is a covered person in all respects of the optional coverages. Other insureds (passengers, operators by consent, members of the named insured's household and pedestrians struck by the insured vehicle) are covered for medical expenses only. There are no limitations on the Right-to-Sue. Vehicle Damage remains under the Tort System.
Texas - A Liability Policy must provide Personal Injury Protection of $42,500 per person covering the named insured, members of household and any other authorized operation or passenger. Each person's medical expenses, loss of income, loss of services and funeral expenses are included, subject to the aggregate limit of $2,500 per person.
Benefits are payable without regard to collateral source of benefits and there is no limitation on damages for pain and suffering (the Right-to-Sue). The coverage may be rejected. Property Damage is not affected by the law and remains under the Tort System.
Utah - The Utah Law provides benefits of $3,000 per person for medical and hospital expenses, 85% of gross income loss, up to $250 a week, for as many as 52 weeks, and $20 a day for loss of services for up to 365 days. Both Wage and Service Loss Coverages are subject to a 3-day waiting period that disappears if disability lasts longer than two weeks. There is also a $1,500 funeral benefit and a $3,000 survivors benefit. A covered accident victim cannot sue unless his medical expenses exceed $3,000 or injury results in dismemberment or fracture, permanent disfigurement, permanent disability or death.
Virginia - The Virginia Law is for Bodily Injury only. It provides benefits to the extent of $42,000 for medical and funeral expenses and $5,200 for loss of income at the rate of $100 per week. There are no restrictions on the Right-to-Sue. Benefits prescribed by the law are primary except for Workers’ Compensation, amounts recoverable under the Federal Tort Claims Act or similar legislation.
Washington - First Party Add-On Benefits are provided for under a voluntary plan promulgated by the Washington Insurance Department for all types of vehicles. An insured has the option of purchasing either or both Medical and Work Loss Benefits. Benefit limits are: $10,000 for medical (including funeral), $10,000 for wage loss ($10,000, up to $200 per week, not exceeding 85% of income per week, beginning 14 days after accident), up to $12 per day for replacement services. Payment of benefits is limited to one year.
Wisconsin - Provisions are made under the law for First Party Add-On Medical Benefits of $1,000, to which persons who are occupants of a secured vehicle in and out of state are entitled. The protection is available for all vehicles.
Chapter 8 - Review Questions
1. All of the following are methods of compensating accident victims except:
A. Tort Liability System
B. Financial Responsibility Laws
C. Uninsured Motorists Coverage
D. Shared Market
2. What law requires the owners or operators of autos to carry Automobile Liability Insurance at least equal to certain minimum limits before the vehicle can be licensed or registered?
A. No-Fault Insurance Law
B. Compulsory Insurance Laws
C. Shared Market Insurance Laws
D. none of the above
3. What law prevents the injured person from suing regardless of the severity of the injury?
A. Modified No-Fault
B. Add-On Plans
C. Pure No-Fault
D. None of the above
4. All of the following are typical No-Fault Benefits except
A. liability protection
B. loss of earnings
C. funeral expenses
D. medical expenses
5. Another name for the Automobile Insurance Plan is:
A. JUA
B. Insurance fund
C. Assigned risk
D. all of the above
Answers
1. D
2. B
3. C
4. A
5. C