State Decisions to Limit Tort Liability: An Empirical Analysis of No-Fault Automobile Insurance Laws
Harrington, Scott E., Journal of Risk and Insurance
Sixteen states enacted auto insurance no-fault laws from 1971 through 1976 that generally contained two key features: (1) the purchase of first-party coverage for medical expenses and loss of income for drivers and passengers, known as personal injury protection (PIP), was made compulsory; and (2) tort liability of negligent drivers was limited.(1) The purchase of liability insurance for actions not affected by tort limitations also was made compulsory. Three other states enacted laws during this period that made PIP and liability coverage compulsory without limiting tort liability.(2) No state has adopted no-fault since 1976. The District of Columbia adopted a no-fault law in 1983, but it was repealed in 1986. Nevada repealed its no-fault law in 1979. Pennsylvania repealed its limitation on tort liability in 1984 but maintained compulsory PIP coverage. A subsequent change in Pennsylvania law allowed consumers to choose tort limitations in exchange for a premium discount on liability coverage. New Jersey also modified its original mandatory tort restrictions to allow consumer choice.
Despite the failure of no-fault auto insurance to spread to additional states since 1976, the subject remains of considerable interest, especially the concept of allowing consumers to choose no-fault. No-fault is often viewed as a means of reducing the cost of auto insurance. The policy debate parallels discussion in the early 1970s, when no-fault was commonly advertised as a desirable means of reducing costs. Several states included mandatory premium cuts in their no-fault laws. In addition to reducing costs and helping to make coverage more affordable, proponents of no-fault argue that the substitution of first-party medical coverage for third-party liability coverage is advantageous because it reduces dispute resolution costs and payments for general damages (pain and suffering). No-fault also leads to faster payment for losses. Opponents of no-fault argue that limitations on tort liability lead to more accidents and unfairly benefit negligent drivers. They also question whether no-fault is capable of significantly reducing premiums.
The literature on no-fault is massive and goes back at least 60 years. The modern economic literature generally has focused on two issues: whether tort limitations have affected the frequency and severity of accidents and/or claims (e.g., Landes, 1982; Zador and Lund, 1986; and Cummins and Weiss, 1989, 1992) and whether no-fault laws have led to significantly lower premiums (e.g., Smith, 1989; Cummins and Weiss, 1991; Johnson, Flanigan, and Winkler, 1992; also see Carroll et al., 1991).(3) Analyses of the former issue provide only weak evidence that limitations on tort liability have affected accident frequency and severity. Analyses of the effect of no-fault on premiums provide mixed results. Consistent with intuition, the overall results suggest that no-fault laws with weak tort limitations combined with large PIP coverage limits increase costs, but that strong tort limitations can reduce total costs, especially if PIP coverage limits are modest. Thus, no-fault laws have the potential to help control auto insurance costs if strong tort limitations are politically feasible (e.g., Cummins and Tennyson, 1992; Harrington, 1991).
This article focuses on a different issue: the decision by state legislatures to enact no-fault laws. The article considers the possible influences of levels and growth rates in insurance costs and the effects of no-fault laws on low-income households, medical care providers, insurers, and attorneys. A probit model of the decision to adopt no-fault from 1971 through 1976 is developed and estimated using cross-state data from 1970.(4) Separate equations are estimated for restrictions on tort liability and the enactment of compulsory PIP coverage. Holding other variables constant, the estimation results suggest: (1) the probability of adopting no-fault was higher in states with more rapid growth in auto liability insurance costs; (2) states with greater numbers of physicians per capita, a measure of the strength of the medical care community, were more likely to adopt no-fault; and (3) states with greater numbers of attorneys per capita were less likely to adopt no-fault laws with restrictions on tort liability. …