Can the Government Cut Average Car Insurance Costs?


A bipartisan group of Congress members has presented a plan to reduce auto-insurance rates in America by $45 billion per year. This is an average of $243 per driver. Sponsors of the Auto Choice Reform Act say the proposal achieves this goal by giving drivers across the country the choice of traditional auto insurance or a “no fault” policy.

Senator Joseph Lieberman (Democrat from Connecticut) said that “This is a really smart idea” during a Senate hearing last week. The potential savings here are enormous.” Traditional insurance allows drivers to sue each others and their insurance companies to determine fault or assess damages for “pain & suffering.” The bill’s sponsors argue that this tort-based system is too costly for consumers, clogs the courts and funnels large sums of money away victims and into the pockets and pockets of trial lawyers.

No-fault insurance isn’t a new concept. Critics say that motorists in states where it has been implemented have seen their premiums rise more quickly than under the tort-based system. Harvey Rosenfield, the architect of California’s Proposition 103 (an 1988 ballot initiative that lowered auto-insurance rates and imposed strict regulations on the activities of insurance companies in the state), says that “after nearly 25 years of experimentation using no-fault …, there is only one conclusion.”

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Drivers have two options: they can remain in the state’s existing program but retain their right to sue for suffering and pain. They can also choose to opt for a “personal protection system,” which allows them to trade their right to sue in exchange for prompt reimbursement of economic loss as specified in their insurance policy. This is often referred to as “no-fault”.

The bill could be adopted by a state as its insurance law, or it could be exempted from the provisions. If the state officials find that the no-fault program does not reduce rates by at least 30% for individuals with the personal protection system, they could exempt the states. This partial preemption of state law alarms some opponents, as well as advocates for states-rights. Although no state would be forced to adopt the measure by the federal government, opponents fear that the bill could be the start of federal interference in areas traditionally reserved for states.

Supporters believe that no-fault is the best option to manage ever-rising auto insurance costs. Dick Armey, the House majority leader from Texas, who is also a bill cosponsor in this lower chamber, said that the main culprits for high auto insurance costs are excessive pain-and suffering lawsuits, which can be costly, and rampant fraud and abuse. These forces combined drove rates up by 44 percent between 1987 and 1994 – approximately 1-1/2 times the rate inflation.

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Both sides point to studies that support their positions. The Rand Institute for Civil Justice in California, which is based in California, cites a 1995 Rand Institute report that shows that people with less than $5,000 of economic losses are often awarded two to three times what they would have received under conventional insurance. However, people with more severe economic losses than $100,000 are often only eligible for 9 percent.

A joint study by Ralph Nader’s Proposition 103 Enforcement Project, Mr. Rosenfield, and Public Citizen, a national consumer organization, found that states with no fault have the highest car insurance costs and that their premiums are increasing 25 percent faster than other states.

Andrew Tobias (author and financial adviser) supports the bill. He says that no-fault hasn’t been properly tested. He says that Michigan is the only state with a no-fault system. This prevents drivers from suing each other for their pain and suffering. Only Michigan provides unlimited medical benefits and “significant wage-loss protection.” He says, “If this proposal is a terrible choice that doesn’t save money, people will not choose it.”

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