Equity in Automobile Insurance: Optional No-Fault
Powers, Michael R., Journal of Risk and Insurance
Throughout the past decade, automobile insurance premiums have escalated in many jurisdictions. Excessive litigation and the over-utilization of medical services have been primary forces pushing the price of automobile insurance beyond the reach of many consumers. Nationally, automobile insurance premiums increased an average of 9.6 percent annually, about three times the average rate of increase in the Consumer Price Index, from 1982 through 1988 (see A. M. Best Company, 1990). In Pennsylvania, where major automobile insurance reform has been enacted recently, the rate of increase was almost identical to the national average during this period of time.
In Philadelphia County, where the price of automobile insurance has grown most dramatically, the frequencies of both bodily injury liability and first party benefit claims were more than three times those in the rest of the state between 1983 and 1987 (see Insurance Services Office and National Association of Independent Insurers, 1988, p. 38). This region, where automobile insurance has been the least affordable, is also the area with the greatest proportion of uninsured motorists.
To make automobile insurance more affordable in Pennsylvania, Governor Robert P. Casey introduced a package of reforms in June 1989 aimed at bringing both excessive litigation and automobile-related medical costs under control. The Governor's program, based upon research conducted by the Pennsylvania Insurance Department, included both an optional no-fault system and provisions to cap medical reimbursements and implement medical provider peer review. This package was passed by the Pennsylvania General Assembly and signed into law as Act 6 in February 1990.
Pennsylvania's optional no-fault system is conceptually very similar to the optional no-fault system implemented in New Jersey in 1989. Under both systems, all private passenger named insureds are given the opportunity to elect either a tort or no-fault option that is binding on both themselves and other members of their households who are not named insureds, so that all private passenger automobile insureds(1) may be classified as either tort electors or no-fault electors. Tort electors continue to enjoy their traditional tort rights in all situations, whereas no-fault electors relinquish their right to seek recovery for non-economic (pain and suffering) damages except when their injuries satisfy a verbal tort threshold (i.e., are sufficiently serious, as defined in the law). In return for restricting their tort rights (including the tort rights of other household members), no-fault insureds receive a substantial reduction in their bodily injury liability and uninsured/underinsured motorist premiums.
In the face of strong opposition to no-fault from Pennsylvania's trial bar, it was necessary to develop a system that was clearly equitable to all parties. Thus, only a system that gave consumers the freedom to choose between retaining their traditional tort rights, and restricting their tort rights in return for reductions in premiums, was acceptable. Also, it was imperative that the election of one insured not affect the tort rights of other automobile accident victims (except those from the same household). For these reasons, optional no-fault, rather than mandatory no-fault, was pursued by the administration and legislature.
Equity in Automobile Liability Insurance
From the time the no-fault concept was first proposed for automobile insurance by Keeton and O'Connell (1965), its proponents have supported it with both efficiency and equity arguments. Specifically, it is argued that by compensating victims on a no-fault basis for their economic (medical and income) losses, and restricting traditional tort rights: (1) the recovery system is more efficient, because victims are compensated more quickly, and less money is spent on attorneys' fees and court costs, and (2) the recovery system is more equitable, because there is less over-compensation of victims with minor injuries, and more adequate compensation of victims with serious injuries. …