An Economic Analysis of Auto Compensation Systems: Choice Experiences from New Jersey and Pennsylvania

By Schmit, Joan T.; Yeh, Jia-Hsing | Journal of Risk and Insurance, December 2003 | Go to article overview

An Economic Analysis of Auto Compensation Systems: Choice Experiences from New Jersey and Pennsylvania


Schmit, Joan T., Yeh, Jia-Hsing, Journal of Risk and Insurance


ABSTRACT

Nearly since the first automobile traveled on U.S. soil, questions about how best to compensate people injured by their use have been raised. As early as in 1932, in fact, the tort system of imposing costs on negligent drivers was strongly criticized, and a system of compensation without regard to negligence recommended. Yet despite various efforts to identify and implement improved systems during the past more than 70 years, no clear best compensation mechanism has been found. Current discussions have focused on the "choice" system, under which insureds are allowed to select either a tort system or a no-fault system of compensation at the time of insurance purchase. New Jersey and Pennsylvania, which implemented very similar choice programs in 1989 and 1990, respectively, offer an opportunity to observe the effects of choice on outcomes such as: use of attorneys, speed of payment, and consistency (equity) of payment. Our results indicate outcomes consistent with expectations in New Jersey (NJ), which switched from no-fault to choice, but inconsistent with expectations in Pennsylvania (PA), which switched from tort to choice. Furthermore, analysis of tort versus no-fault selectors postchoice in New Jersey and Pennsylvania does not offer clear evidence of no-fault's lower administrative costs and speedier, more equitable payment in these jurisdictions.

INTRODUCTION

Involving more than 6.3 million accidents annually, at a cost in excess of $135 billion, the automobile accident reparation systems in the United States are economically and socially important. Yet, despite years of study and debate, no clear best mechanism for compensating those injured in automobile accidents has been found.

Most automobile accidents in the United States are subject to the tort system, which requires proof of driver negligence (fault) for an injured party to be compensated. For decades, the tort system has been criticized as being administratively wasteful, time consuming, and inequitable in payment (see Lascher and Powers, 2001). During the 1970s and 1980s, 16 states and Puerto Rico responded by enacting no-fault plans, which permit all injured parties to receive some, if not total, compensation from their own insurers regardless of fault while limiting the use of litigation to obtain compensation for those injuries. (1) The intention was to assure timely payment for injuries while reducing administrative costs.

Yet, by the mid 1980s, the public interest in no-fault seems to have waned. Possible reasons for the change in attitude include a general leveling in automobile insurance premiums, lack of clear experience demonstrating that no-fault reduces insurance costs, and public debate over the role of personal responsibility for negligent driving. "Choice," a system under which motorists select between tort and no-fault when they purchase insurance, evolved as an apparent response to these conditions, and became law in New Jersey and Pennsylvania approximately a decade ago. (2) With the availability of the Insurance Research Council's (IRC) most recent closed claim study, we are able to assess the effect of choice on various claim characteristics. These data also allow direct comparisons of no-fault and tort systems within the same jurisdiction.

The purpose of the research reported here, therefore, is to present empirical evidence of the effects of choice in Pennsylvania and New Jersey as well as differences between tort and no-fault systems within these two jurisdictions. Specific attention is given to the three areas of automobile tort compensation systems generally highlighted in the literature as needing improvement: involvement of legal counsel (generally considered representative of administrative costs), speed of payment, and variability of payment.

LITERATURE REVIEW

With approximately half of all property-liability insurance premiums in the United States going to automobile coverages, the area has been the focus of numerous theoretical and empirical studies. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

An Economic Analysis of Auto Compensation Systems: Choice Experiences from New Jersey and Pennsylvania
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.