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
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.
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.
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. …