Cpcu 555 Ch.2

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Compensation of Accident Victims

Back 1

Approaches to compendsation accident victims: Tort liability system, Financial resopnsibility laws, Compulsory insurance laws, Uninsured motorists coverage, Underinsured motorists coverage and No-fault insurance.

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Tort liability system

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The tort liability system id based on fault. Most commonly used method of seeking compensation for accident victims.

Most tort liability cases arise out of negligence. Auto accident victims must prove another party was at fault before collecting damages. Amount of damages can be determined through negotiations between the two parties or through a lawsuit and court settlement.

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Tort liability system pt.2

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Advantages of tort liability system: Provides remedy for victims of negligence or irresponsible drivers who cause accidents. Victims are compensated for their costs. Incentive for drivers to act responsibly.

Disadvantages of tort liability system: Delays in reaching settlement (can take months or years even to reach out of court settlement). Significant legal and administrative costs. Punitive damages may be excessive (this can be disadvantage for the person being sued).

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Financial resposibility laws

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Some state have financial responsibility laws. Financial responsibility laws require motorists to provide proof of financial responsibility. Failure to provide proof can result in suspension of license and registration.

Required in these circumstances: Accident involving injury or personal damages. After conviction for certain serious offenses, such as drunk driving. Upon failure to pay a final judgement that results an auto accident.

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Financial resposibility laws pt.2

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Advantages of financial responsibility laws: Provide some protection to victims. Works with tort liability system to ensure at-fault drivers are held liable and pay damages.

Disadvantages of financial responsibility laws: Most requirements become effective only after an accident, conviction or judgement. Victims may not be fully compensated (low limits). Victims of uninsured or hit-and-run drivers may not be compensated.

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Compulsory auto insurance laws

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Most states have compulsory auto insurance laws requiring auto liability insurance for all motorists to drive legally within the state. Many states require the insurer to verify insurance coverage.

Advantages of compulsory laws: Work in conjunction with tort liability system to ensure compensation for victims. Motorists must provide proof of financial responsibility before an accident occurs. Difference between compulsory and financial responsibility laws is that financial responsibility laws only require proof of insurance after an accident but compulsory laws require proof of insurance to get a license before a loss has occurred.

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Compulsory auto insurance pt.2

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Disadvantages of compulsory insurance: Do not guarantee compensation to all victims (just because its the law doesn't mean everyone will comply). Required minimum amount of insurance may not meet full needs of accident victims. May not reduce number of uninsured drivers. Insurers argue that compulsory laws restrict their freedom to select profitable insureds (may require insurers to offer insurance to everyone instead of letting insurer select their customers). Consumer advocated argue rates might become unfairly high for good drivers. Do not reduce number of accidents. May cause insurance rates to become unfairly high for good drivers.

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Compulsory auto insurance pt.3

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Several states have implemented measures to respond to the disadvantages. Offer low-cost auto insurance - makes minimal liability coverage available at reduced cost so all may have insurance instead of driving w/o it. No pay, no play law - prohibits uninsured drivers form initiating lawsuits for pain and suffering if they are in an accident and the other party is at fault. Unsatisfied judgement funds - provide victims compensation for judgments that cannot be collected against negligent drivers (if you sue a negligent driver and they can't pay the full amount, there may be government fund that you can collect from).

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Uninsured motorists coverage

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Uninsured motorists (UM) coverage compensates an insured for bodily injury caused by: Uninsured motorists, Hit-and-run driver and driver whose insurer is insolvent.

Most states require all automobile liability policies contain UM coverage. Insured can waive coverage in writing.

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Uninsured motorists coverage pt.2

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Advantage of UM coverage: Provides some financial protection against uninsured drivers.

Disadvantage of UM coverage: Injured person may not be fully compensated (low limits). Injured person must establish the uninsured motorist's legal responsibility (have to prove other party was at fault). Property damage is excluded in may states (only cover BI). Victim is paying for insurance to protect against the failure of others to act responsibly.

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Underinsured motorists coverage

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Underinsured motorists (UIM) coverage provides additional limits of protection to the victim when the negligent driver's insurance limits are insufficient (other party has low limits). Assists in compensating victims who would not be fully compensated otherwise. Even UIM coverage may be insufficient to cover all costs. Victim is paying for insurance to protect against the failure of others to act responsibly.

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No-fault automobile insurance

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Many states, about half, have no-fault auto insurance laws (first party coverage). Allows victim to collect damages from own insurer without proving negligence. Certain no-fault laws restrict an injured person's right to sue a negligent driver.

No-fault laws were developed to avoid the process of determining legal liability for auto accidents under the tort liability system.

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No-fault automobile insurance pt.2

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Advantages of no-fault automobile insurance: Eliminate need to determine fault. Eliminate inequities in claim payments (some argue the tort system results in small claims being overpaid (large claims sometimes underpaid)). Expand limited scope of tort system (allows more people to collect damages such as family members or heirs of deceased victim). Decrease the portion of premiums used for claim investigation and legal costs (if you don't have to prove fault the premium should go down b/c insurer is not spending money on investigation or defense). Reduce delays in payments.

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No-fault automobile insurance pt.3

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Disadvantages of no-fault automobile insurance: Premiums have not decreased significantly and in some cases have increased. Rating system used may allocate accident costs to drivers who are not responsible for the accidents (don't have to prove fault so driver not at fault could get penalized). Benefits do not include pain and suffering. Fraud may be increased (physicians and other professionals abuse the system by inflating fees).

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No-fault automobile laws

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No-fault laws authorize or mandate auto no-fault insurance. Often referred to as personal injury protection (PIP). Laws define the benefits that insurers can or must provide.

Insurers in no-fault states avoid process of determining legal responsibility for accidents. Instead handle claims quickly (should theoretically lower premiums for insureds but that's not always the case).

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Types of no-fault laws

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Types of no-fault laws: Pure no-fault - injured person does not need to establish fault or prove negligence (abolishes use of tort liability system for bodily injuries resulting from accidents (no right to sue at fault party, even if limit is exceeded), no state has enacted a pure no-fault law). Modified no-fault. Add-on plans. Choice no-fault plans.

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Modified no-fault plans

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Modified no-fault plans places some restrictions on the right to sue an at-fault driver. Do not entirely eliminate the right to sue.

Injured motorists collect economic losses from their own insurers through PIP benefits mandated by the plan (collect under own policy first, can sue at fault party for the difference between what PIP covers and what your full medical bills are). Can sue at-fault drivers for economic losses that exceed the no-fault coverage limits.

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Modified no-fault plans pt.2

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Injured motorists can also sue at-fault drivers for noneconomic losses, such as pain and suffering, if injuries exceed threshold.

Monetary threshold - victim can sue for noneconomic losses if economic losses exceed stated dollar amount (e.x. ina state where monetary threshold is $5000 and you have $30k in med expenses, since loss exceeds state threshold you can sue at fault party for noneconomic losses).

Verbal threshold - victim can sue for noneconomic losses if his or her injuries meet a verbal description of serious injuries (death or permanent disfigurement).

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Add-on plans

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An add-on plan adds no-fault benefits to auto insurance policies. Differs from modified no-fault plan because it places no restrictions on the injured person's right to sue a negligent party for damages. Offers insured the option of collecting for economic losses through his or her own insurer (if you have auto policy w/ this add on coverage you could choose to collect from your own insurance or choose to go after at fault party directly).

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Choice no-fault plans

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Under a choice no-fault plan when a policy is purchased or renewed insureds can choose to be covered on a modified no-fault basis. Modified no-fault option provides premium reductions in exchange for restrictions on right to sue.

Inmost states insureds who choose not to be covered under modified no-fault must instead purchase add-on coverage which may be more expensive.

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Summary

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Pure no-fault - no right to sue.

Modified no-fault - right to sue with restrictions.

Add-on plan - right to sue.

Choice no-fault if selection of modified no-fault made - right to sue with restrictions. Choice no-fault if add-on no-fault purchased - right to sue.

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Benefits required by no-fault laws

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Typical benefits required by no-fault laws: medical/funeral expenses - usually limited. Rehabilitation expenses. Loss of earnings - proportion of lost earnings. Expenses for essential services - services necessary for household tasks insured can no longer perform. Survivors' loss benefits.

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Benefits required by no-fault laws

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Insurers provide no-fault benefits by adding an endorsement to an auto insurance policy. Typically called PIP endorsement. Varies by state. In some states, the no-fault laws specify precise policy langue to be used. Nearly all no-fault laws specify coverage for bodily injury and exclude property damage.

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High risk drivers

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High-risk drivers include those who: Habitually violate traffic laws. Have caused excessive number of accidents. Have been convicted of certain offenses.

High-risk drivers can get coverage through these programs: Voluntary market - insurance offered by private insurers (usually higher premium). Residual market - available to those unable to obtain private insurance.

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Voluntary market

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Some insurers in voluntary market offer programs for high-risk drivers. Called nonstandard insurance programs. Insurers accept applications, receives premiums and pays claims.

Insurers offering high-risk programs may impose restrictions and take other measures to reduce risk.

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Voluntary market pt.2

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Characteristics of high-risk driver programs: Insurers limit coverage to comply with state's financial responsibility requirement (low liability limits) (insurers may offer optimal higher limits). Medical payments coverage may be limited. Collision insurance may be available only with high deductible. Premiums are substantially higher than those charged for average and above-average drivers.

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Residual market

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The residual market represents state programs that make insurance available to high-risk drivers through a shared risk mechanism (typically state creates the program and designs it and different insurance companies in the state share the losses). Automobile insurance plans. Joint underwriting associations (JUAs). Reinsurance facility.

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Residual market pt.2

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Plan in which all auto insurer doing business in the state are assigned their proportionate share of high-risk drivers based on the total volume of automobile insurance written in a state.

Automobile insurance plans assign auto insurers in the state their share of high-risk drivers. Based on volume of insurance written in state. E.x. 10% of all insurance plans in TX are written by ABC auto therefore 10% of the high risk drivers in TX will be allocated to ABC auto.

Common characteristics. Applicants must prove cannot obtain liability insurance within certain number of days (60). Minimum limits of insurance are at least equal to state's financial responsibility requirement. Certain applicants may be ineligible (no DL or convicted of DUI). Premiums higher than voluntary market.

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Residual market pt.3

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Organization in which all auto insurers pay a proportionate share of total underwriting losses and expenses based on each insurer's share of voluntary auto insurance written in the state.

Joint underwriting associations (JUAs) are organizations that designate servicing insurers to handle high-risk auto insurance business. Association/organization is formed and sets insurance rates and approves policy forms to be used for high-risk drivers. Generally, assoc. hires a limited number of insurers that are designated as servicing insurers. Vary by state.

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Residual market pt.4

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Agents and brokers submit applications to the JUA or to designated servicing insurer. Servicing insurer received applications, issues policies, collects premiums, settles claims and provides other services.

In a state that offers a JUA all auto insurers pay a share of total losses and expenses. Ratio based on each insurer's share of voluntary auto insurance written in the state.

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Reinsurance facility

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A reinsurance facility is a pool to which insurers can assign premiums and losses for high-risk driver. Insurers accept all auto insurance applicants who have a valid driver's license. Insurers issue policies, collect premiums and settle claims. When a private insurer accepts a high-risk driver the insurer can assign premiums and losses to the reinsurance facility while continuing to service the policy.

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Rate regulation

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Insurers are in business to make a profit and this goal can conflict with the public's perceived right to purchase insurance. Government regulation of rates helps resolve this conflict.

Concerns of rate regulation: Rating factors. Matching price to exposure. Competition. Other regulatory issues.

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Rating factors

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Rating systems vary by state and insurer. Most states and insurers use primary rating factors (use of the automobile, marital status, age, gender ect.) for determining the cost of personal auto insurance. Several states no longer permit the use of some factors that they consider unfairly discriminatory.

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Rating factors pt.2

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Primary rating factors include: Territory - determined by where auto is normally used and garaged. Use of the auto - pleasure, driving to work or school, business and farm. Age. Gender - women have tended to have fewer accidents than men of the same age. Marital status - married men tend to have fewer accidents than unmarried men.

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Rating factors pt.3

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Auto insurers often use additional factors, which are not essential in rating classifications: Driving record. Driver education. Good student. Multi-car policy (reduces administrative costs). Years of driving experience. Credit-based insurance score (similar to credit score, however it excludes income data, insurance score is based on financial history). Type of auto. Deductibles and liability limits.

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Matching price to exposure

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Insurers often divide auto insurance applicants into rating categories such as "preferred," "standard" and "nonstandard." Reflect different levels of exposure to loss. Applicants with good driving records and rating factors are categorized as preferred (has lower premium than standard or nonstandard).

Regulators usually approve these categories because policyholders receive fair treatment based on the loss exposures they present.

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Competition

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Insurers tend to consider competitive cycles in pricing personal auto insurance. Regulators must monitor rates carefully to ensure adequacy and reasonableness. Insurance regulators monitor rates primarily through rate filings. Insurers' rates must always meet the state requirements. If there's alot of competition some insurers may lower rates to attract more drivers but if lowering rates may not have enough premium to pay losses. Competition for profitable auto business is often intense among insurers, when insurers are make a profit they often compete with each other by lowering rates.

E.x. Insured drives a 10yr old minivan and was recently rear-ended, when insured receives a renewal notice they see their rates have decreased, this would be most likely due to her insurance company competing with other insurers.

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Other regulatory issues

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Other regulatory issues affect rates: Rising healthcare costs - increasing cost of healthcare directly impacts medical payments and liability payments. Environmental issues - state emissions regulations increase auto costs and result in higher claim payments. Vehicle modifications - can put insureds at a greater risk of collision.