Automobile liability insurance is an enduring national disgrace. It has become an employment program for lawyers that imposes excessive premiums on motorists and undercompensates seriously injured accident victims. The system could be vastly improved–with lower premiums or better coverage–by replacing it with no-fault insurance. Indeed, Congress is considering a plan to do that, but its prospects are uncertain. The fact that we don’t change is a tale of collective self-delusion. The chief obstacle is the belief that suing someone else is a natural right that almost always serves some larger social good.
We insist on a system that enables motorists in an accident to sue each other to see who’s right and wrong. The result is a costly and lengthy process in which lawyers for the drivers and insurance companies bargain over who’s “at fault” and which insurance company will pay how much in damages. About 98 percent of these suits are settled out of court in routine negotiations that provide steady income the lawyers. In effect, Americans have been duped by their lawyers into thinking the process is about justice when it’s really about money.
To see how badly it works, consider what happened to the $40 billion Americans paid for personal-injury auto liability insurance in 1996. The Insurance Information Institute estimates that accident victims received only a fifth for economic losses: medical bills and lost wages. Another 24 percent went to accident victims as “pain and suffering” beyond economic losses. Lawyers got 28 percent. The split was about two-thirds for plaintiff lawyers–those suing on behalf of drivers–and the rest for insurance companies’ defense lawyers. Insurance companies’ overhead costs accounted for the remaining 28 percent.
All told, victims received only about 44 percent of premiums. This may seem adequate, but the trouble is that much of the payout goes to the wrong victims. People with minor injuries often receive more than their economic loss (again: health costs and lost wages). By contrast, the seriously injured typically don’t recover their economic losses, let alone pain and suffering. One study found this: Victims with $500 to $1,000 in economic losses got more than twice their losses; victims with economic losses between $25,000 and $100,000 recovered about half; and people with losses exceeding $100,000 recovered only 9 percent.
These differences are indefensible, but explainable. Most insurance policies have payout limits. States set minimum liability coverage, and motorists can buy extra protection. Coverage is concentrated between $20,000 and $100,000. And lawyers take about a third of any award. The seriously injured fare poorly.
The story is just the opposite for people with minor injuries–or no injuries. They recover more, because the system encourages excessive pain-and-suffering claims (usually two to three times economic losses) up to insurance limits. Lawyers have every reason to file these claims, and insurance companies have little reason to resist: Contesting them in court would often cost more than simply paying.
All these defects are compounded by fraud. There are huge incentives to falsify medical bills to reap larger pain-and-suffering awards. Some fraud is organized: staged accidents to collect insurance. But perhaps 90 percent of fraud is casual: individuals padding their bills–often with the cooperation or consent of lawyers and doctors–by exaggerating neck, back or limb strains.
A report by the congressional Joint Economic Committee estimates that all fraud now consumes about $1 out of $8 in insurance premiums. The report rightly calls all the system’s unnecessary costs a “tort tax”: the price of suing. No-fault insurance would curb these flaws. People would insure against economic losses from accidents. Pain and suffering would vanish. So would suits against other drivers; so would most lawyers. Insurance companies would compensate for actual costs–not inflated or invented claims. Potential benefits are huge. Lawyers’ fees and pain-and-suffering claims consume more than half the premium dollar. Premium rates could fall; or payouts for the seriously injured could expand.
The plan before Congress (H.R. 2021 and S. 625) would push states toward no-fault auto insurance. Trial lawyers argue that no-fault insurance hasn’t worked well in some states that have tried it. True, but the reason is that these programs have not been genuine no-fault. They merely set higher damage thresholds for suits; this encourages more inflation of medical bills to exceed damage thresholds.
But the trial lawyers’ lobby, though powerful, is not what prevents change. It is public opinion. Americans grumble about car insurance but do not understand how the system works and, more importantly, think that it should allow them to get even and get rich. Americans dislike lawyers; but they like the right to sue. While the contradiction survives, we will reap what we sow.