Congress has been quietly proceeding toward the enactment of legislation that would radically change the nature of auto insurance in every state in the nation. Called "auto choice," the proposed legislation purports to promote the conservative values of freedom and responsibility by giving drivers the opportunity to choose what level of insurance benefits they will buy and whether they want to avoid lawyers for the resolu tion of auto accident disputes.
The terminology of "choice," however, is deeply misleading. If enacted, auto-choice legislation is likely to harm every responsible driver in the country. For the most important choice it offers is the opportunity for high-risk drivers to escape responsibility for the accident costs they impose on the more careful. Auto choice may reduce insurance premiums initially, but its principal effect will be to increase the accident rate.
How Auto Choice Works
In essence, auto choice would replace the current system of liability insurance with federal no-fault insurance. Its proponents argue that pain-and-suffering damages from auto accidents are unnecessary and the involvement of lawyers and the legal system in settling claims is needless, imposing only excessive administrative costs. Thus, the legislation would allow a driver to select insurance coverage so that, if injured, he would recover only economic losses (medical costs and lost wages), not pain and suffering, and would recover from his own insurer on a no-fault basis without the need to hire a lawyer to prove that the other driver was at fault.
Drivers wanting greater coverage could choose to continue to be covered for pain and suffering, as well as to sue in court if hit by another driver carrying full insurance. But they could not sue if hit by a driver who has disclaimed pain and suffering; in such a case, the injured driver would have to recover against his own insurer. Proponents claim that those who choose lower coverage will sharply reduce their insurance premiums by eliminating pain and suffering and attorneys’ fees. (They call this a "tax cut" even though these are true costs, not taxes.)
Auto choice has been supported by a wide range of Republicans and some prominent Democrats, though it has been opposed strongly by the trial lawyers who see a major source of attorneys’ fees disappearing. I certainly have no sympathy for lost fees to the trial lawyers. But auto choice is a very peculiar form of Republican or conservative legislation.
The auto-choice idea was first devised in 1971 by my colleague Guido Calabresi, now a federal appeals judge. For the past decade, it has been promoted heavily by Jeffrey O’Connell of the University of Virginia Law School, a tireless advocate of no-fault in any form. Regrettably, though many states have experimented with no-fault plans of different varieties, not one has been shown to reduce insurance premiums. Proponents provide many excuses as to why these plans have been unsuccessful; auto-choice proponents claim that their plan finally will work. The reality remains that, in auto choice, Republicans appear to be supporting the federalization of all auto insurance with no idea what the effects of the plan will be.
There are good reasons to believe that those effects will be perverse. A consumer’s choice regarding insurance and the influence of that choice on driving are different from choices made about other products. For most products and services, one person’s use has no effect on other consumers. As a result, maximizing opportunities for consumer choice generally enhances consumer welfare. Insurance and its effect on driving behavior, however, are substantially different.
To see the point, imagine that there are simply two sets of drivers: high-risk and low-risk. High-risk drivers are more likely to cause accidents; low-risk drivers, to be victims of accidents. (Of course, there are many different levels of driver riskiness that insurers underwrite based on age, sex, marital status, accident and violation history, and the like.) Today, under the fault system, the costs that the high-risk impose upon the low-risk are internalized to the high-risk because insurers build them into the liability portion of the high-risk auto insurance premium. The premiums of the low-risk are commensurately lower because they are less likely to be at fault when they are involved in an accident.
Under auto choice, those premium levels are exactly reversed. The premiums of high-risk drivers would go down because they would no longer have to pay for the costs they impose on others. The premiums of careful drivers would ultimately go up because they could no longer recover from high-risk drivers who injured them. Example: You may be the most careful driver in the world, but if you in your parked car are hit by a drowsy, careless, or inexperienced driver, under auto choice the injury costs would be built into your subsequent insurance premiums, not the offending driver’s. Even more perversely, the current legislation applies to commercial drivers. So if you are hit by a semitrailer on the freeway, auto choice would put the burden on you, not the trucking company.
To give a more personal example, several years ago one of my sons was a very high-risk driver; placed in the 16- to 25-year-old male driving category, he was appropriately charged one of the highest premiums in the country. If his parents (in perhaps foolish sympathy) had not subsidized his insurance premium, he would have been priced out of the market, making our highways substantially safer. Under auto choice, we would not have to worry about the premiums. Our son, facing very low potential economic losses (low wage, cheap car, limited medical expenses given that he was young and healthy) and freed from the burden of the accident costs that he might impose on others, would move from paying among the highest insurance premiums in the country to the lowest. As a consequence, among other effects, the adoption of auto choice can be predicted to increase vastly the number of 16- to 25-year-old males (as well as other high-risk groups) among the driving population.
Lessons from No-Fault Experiments
Auto-choice proponents cite several studies by the Rand Corporation that show premiums declining for all drivers choosing no-fault. But these results assume that all drivers are exactly equal and suffer exactly equivalent injuries in any accident. They ignore totally any changes in the source or severity of accidents.
This is not mere theory. We have had a gruesome natural experiment in recent years that proves the effect. Some years ago, the province of Quebec enacted a no-fault auto insurance plan that, in addition to eliminating lawsuits as would the choice plan in the United States, prohibited insurance rate discrimination on grounds of age and sex. The Canadian economist Rose Anne Devlin carefully studied the impact. She found, as expected, that the number of young male (and other high-risk category) drivers increased dramatically while the number of low-risk drivers decreased. Most striking, she found that the number of bodily injury accident claims increased by 26.74 percent and the number of fatal accidents by 9.62 percent.
The study could not distinguish how much of these increases was driven by the elimination of discrimination by age and sex vs. proclivity to cause accidents (that is, by no-fault itself). Still, the best explanation as to why no-fault plans have never been successful in reducing premiums is that the savings from eliminating pain and suffering and attorneys’ fees is offset by increases in the accident rate.
There are ways to reduce the costs of insurance and of litigation without compelling careful drivers to subsidize the high-risk. Premiums can be reduced by enabling drivers to commit themselves in advance to arbitration instead of the courts; by enhancing enforcement to keep uninsured drivers off the road; by eliminating the compulsion in many states to buy first-party personal-injury and uninsured-motorists coverage, which often duplicate private health insurance; and, most important, by freeing insurers to charge premiums to high-risk drivers equal to their risk levels, eliminating assigned-risk pools and other mandatory subsidies of careless drivers.
It would be a deep and abiding misjudgment—indeed, quite possibly a deadly one—to eliminate in the name of "choice" the responsibility that high-risk drivers ought to bear for their own careless driving.
George L. Priest is John M. Olin Professor of Law and Economics at Yale Law School and a member of AEI’s Council of Academic Advisers. He is directing a major AEI study on the effects of state automobile insurance regulation on insurance prices and highway safety.