University of Indianapolis Ch 21 Auto Insurance Summary Paper Auto Insurance one page summary for the power point …………………………………..

University of Indianapolis Ch 21 Auto Insurance Summary Paper Auto Insurance one page summary for the power point …………………………………………….. Chapter 21
Auto Insurance
(Continued)
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Agenda
• Approaches for Compensating Auto
Accident Victims
• Auto Insurance for High-Risk Drivers
• Cost of Auto Insurance
• Shopping for Auto Insurance
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21-2
Approaches for Compensating Auto
Accident Victims
• Many accident victims are unable to recover
damages
– The negligent driver may be uninsured or
underinsured
• States use a number of approaches to
protect accident victims from irresponsible or
reckless drivers
• A financial responsibility law requires
motorists to furnish proof of financial
responsibility up to certain minimum dollar
limits
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21-3
Approaches for Compensating Auto
Accident Victims (Continued)
• Evidence of financial responsibility can be
provided in several ways:
– Producing evidence of an auto liability insurance
policy with at least certain minimum limits
– Posting a bond or depositing the amount required
by law
– Showing that the person is a qualified self-insurer
• Financial responsibility laws provide limited
protection against irresponsible motorists
– There is no guarantee that all accident victims
will be paid
– State laws require only minimum liability limits,
which are relatively low
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21-4
Exhibit 21.1 Automobile Financial Responsibility
Limits by State
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21-5
Exhibit 21.1
Automobile
Financial
Responsibility
Limits by State
(Continued)
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21-6
Approaches for Compensating Auto
Accident Victims (Continued)
• A compulsory insurance law requires
motorists to carry at least a minimum
amount of liability insurance before the
vehicle can be licensed or registered
– Some argue that the law provides greater
protection against uninsured drivers because
motorists must provide evidence of financial
responsibility before an accident occurs
– Critics argue that mandatory insurance does
not reduce the number of uninsured drivers
– Computer reporting systems to track uninsured
motorists have not been effective
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21-7
Approaches for Compensating Auto
Accident Victims (Continued)
• A few states have established unsatisfied
judgment funds for compensating auto
accident victims who have exhausted all
other means of recovery
– The accident must obtain a judgment against
the negligent motorist and show that the
judgment cannot be collected
– The amount paid by the fund is limited by state
law and may be reduced by collateral sources
– The negligent driver must repay the fund
– States use different methods for financing the
benefits, e.g., through insurer assessments
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21-8
Approaches for Compensating Auto
Accident Victims (Continued)
• Many states require uninsured motorists
coverage
– The injured person’s insurer agrees to
compensate for bodily injury caused by an
uninsured motorist, a hit-and-run driver, or a
negligent driver whose insurer is insolvent
– One advantage is that claim settlement is faster
than a tort liability lawsuit
– The injured person must show that the uninsured
motorist is legally liable for the accident
– The minimum limits are low, so an accident
victim may not be fully compensated
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21-9
Approaches for Compensating Auto
Accident Victims (Continued)
• Low-cost auto insurance provides
minimum amounts of liability insurance at
reduced rates to motorists who cannot
afford regular insurance
– Goal is to reduce the number of uninsured
drivers
• Several states have enacted “no pay, no
play” laws which restrict uninsured
motorists from suing negligent drivers for
noneconomic damages
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21-10
No-Fault Auto Insurance
• No-fault auto insurance is another method
for compensating injured accident victims
• Currently, 22 states, the District of
Columbia, and Puerto Rico have some type
of no-fault law in effect
– After an auto accident involving bodily injury,
each party collects from his or her own insurer
regardless of fault
– Enacted because of dissatisfaction and defects
in the traditional tort liability system
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21-11
No-Fault Auto Insurance
(Continued)
• No-fault plans vary among the states
• Under a pure no-fault plan, accident
victims cannot sue at all, regardless of the
amount of the claim
• Under a modified no-fault plan, victims
have a limited right to sue
– In some states, an injured driver may sue if
the bodily injury claim exceeds a certain
monetary threshold
– In some states, an injured driver may sue if
the bodily injury claim exceeds a verbal
threshold, e.g., if the injury involves death,
dismemberment, disfigurement, or permanent
loss of a bodily member or function
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21-12
No-Fault Auto Insurance
(Continued)
• An add-on plan pays benefits to an
accident victim without regard to fault, and
the injured person has the right to sue the
negligent driver who caused the accident
– Not a true no-fault plan
• Under a choice no-fault plan, motorists can
elect to be covered under the state’s nofault law and pay lower premiums
– Or, they can retain the right to sue under the
tort liability system and pay higher premiums
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21-13
No-Fault Auto Insurance
(Continued)
• No-fault benefits are provided by adding
an endorsement to an auto insurance
policy, typically called personal injury
protection coverage (PIP)
• Benefits are restricted to the injured
person’s economic loss, which includes:
–
–
–
–
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Medical expenses
Loss of earnings
Essential services expenses, e.g., housework
Funeral expenses
Survivors’ loss benefits
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21-14
No-Fault Auto Insurance
(Continued)
• In some states, insurers must also offer
optional no-fault benefits above the
prescribed minimums
• The right to sue varies across states with
no-fault or add-on plans
– All states permit a lawsuit in the event of a
serious injury
• No-fault laws cover only bodily injury
– Except in Michigan
– Motorists are allowed to sue the negligent driver
for property damage
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21-15
No-Fault Auto Insurance
(Continued)
• Arguments in support of no-fault laws
include:
– Difficulty in determining fault
– Inequity in claim payments
– High transactions costs and attorney fees
– Fraudulent and inflated claims
– Delay in payments
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21-16
No-Fault Auto Insurance
(Continued)
• Arguments against no-fault laws include:
– Defects of the negligence system are
exaggerated
– Claims of savings from no-fault are exaggerated
– Court delays are confined to a few large cities
– Safe drivers may be penalized by no-fault
– No-fault provides no payment for pain and
suffering
– The present tort liability system needs only to be
reformed
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21-17
No-Fault Auto Insurance
(Continued)
• Some states have repealed their no-fault
laws because relatively low monetary
thresholds have increased the number of
lawsuits
• A study by the Institute for Civil Justice
found that no-fault plans:
– Initially reduced attorney fees and claim
processing costs
– Premiums are higher in no-fault states
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21-18
Auto Insurance for High-Risk
Drivers
• High-risk drivers who have difficulty
obtaining auto insurance in the voluntary
market can obtain insurance in the shared
(residual) market
• Most states have an auto insurance plan
(assigned risk plan) that makes auto
insurance available to motorists who are
unable to obtain insurance in the voluntary
market
– All auto insurers in the state are assigned a
proportionate share of high-risk drivers
– Premiums charged are substantially higher than
those charged in the voluntary markets
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21-19
Exhibit 21.2 Example of an Automobile Insurance
Plan (Generalized)
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21-20
Auto Insurance for High-Risk
Drivers (Continued)
• A few states have established a joint
underwriting association (JUA), in which
auto insurers in the state participate in
providing coverage to high-risk drivers
through a common pool
– Each insurer pays its pro rata share of pool
losses and expenses
– The JUA designs the policies and sets the rates
– Underwriting losses are proportionately shared
by the companies based on premiums written
– A limited number of insurers are designated as
servicing insurers, but all insurers participate in
the pool
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21-21
Auto Insurance for High-Risk
Drivers (Continued)
• A few states have established a reinsurance
facility (or pool) for placing high-risk drivers
• The Maryland Automobile Insurance Fund
provides insurance to high-risk drivers who
have been canceled or refused insurance by
private insurers
• Specialty insurers are insurers that
specialize in insuring motorists with poor
driving records
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21-22
Cost of Auto Insurance
• Insurers use a variety of factors to establish
auto insurance premiums, including:
–
–
–
–
–
–
–
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Territory
Age, gender, and marital status
Use of the auto
Driver education
Good student discount
Number and types of cars
Individual driving record
Insurance score
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21-23
Exhibit 21.3 Top Ten Most Expensive and Least
Expensive Cities for Automobile Insurance, 20141
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21-24
Exhibit 21.4 Drivers in Motor Vehicle Crashes by
Age, 2012
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21-25
Exhibit 21.5 Tips for Buying Auto Insurance
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21-26

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