Academic journal article Risk Management and Insurance Review

First-Party versus Third-Party Compensation for Automobile Accidents: Evidence from Canada

Academic journal article Risk Management and Insurance Review

First-Party versus Third-Party Compensation for Automobile Accidents: Evidence from Canada

Article excerpt

ABSTRACT

Insurance regimes for compensating losses arising from automobile accidents vary by jurisdiction, ranging from a pure tort system to a pure no-fault system, with both systems having well-documented benefits and costs. The majority of published research focuses on the benefits and costs associated with the compensation for bodily injury. This article extends the existing literature by examining the differences between first-party and third-party recovery for both physical damage and bodily injury losses in Canada. Our comparison of auto insurance costs per insured vehicle suggests that government-run, pure no-fault provinces have lower average costs than provinces with private tort and modified no-fault. Lower costs arise from the elimination of tort costs associated with noneconomic damages, lower claims settlement costs due to first-party compensation, and scales of economy arising from monopoly power. The second goal of the article is to examine the impact of first- versus third-party compensation on the settlement of property damage claims. We analyze the claim files of a large insurer that operates within both a traditional tort (third-party) environment and a first-party recovery environment for property damage. We find that in a first-party recovery regime claims are settled sooner, settlement costs are lower, and not-at-fault drivers are compensated at a higher rate than in the traditional tort environment.

INTRODUCTION

Insurance regimes for compensating persons injured in automobile accidents vary across jurisdictions. On one end of the spectrum are pure tort regimes whereby persons are compensated for their injuries only if another party is at fault, with payment coming from the at-fault driver's Habihty insurance. The third-party insurer pays for the loss, and there is no first-party compensation. In contrast, there are pure no-fault regimes whereby injured parties are fully compensated for their injuries by their own insurer, even if they are at fault, and have a complete prohibition against any right to sue an at-fault party. In this regime, the first-party insurer provides compensation.

Dissatisfaction with existing tort regimes led to the development of no-fault insurance (Lascher, 1999). Proponents of no-fault claimed that it would overcome many of the inefficiencies and inequities of the existing tort regimes: achieving faster settlement of claims, lower claim settlement costs, and more accurate compensation for economic losses (O'Connell, 1989; Keeton and O'Connell, 1965; among others). No-fault regimes attempt to compensate those injured in accidents without regard to fault, while the aim of a tort regime is to judge fault accurately and to hold the at-fault party financially responsible. In short, whereas no-fault regimes place a greater emphasis on compensation, tort regimes place a greater focus on accountability for negligence. Currently, in North America, most states and provinces have something in between: auto insurance provides for some level of first-party benefits for injuries and there may or may not be some restriction on the right to sue.

Many researchers have described the advantages and disadvantages of both tort and nofault regimes and attempted to measure the differences between the two. The majority of the work has focused on insurance costs and compensation for bodily injury since no-fault regimes in the United States relate to bodily injury only.1 It is an empirical question whether or not no-fault can help control auto insurance costs. Fundamentally, costs depend on the level of first-party benefits and the threshold that determines which parties have the right to sue.

This research adds to the literature by examining two key issues. First, we look at the relationship between the insurance regime (tort vs. no-fault), market structure (private vs. government run), and insurance costs for mandatory insurance coverages across Canada. …

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