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Capitol Comment

    Capitol Comment 201 - In Defense of Auto Choice Insurance Reform

    09/09/1998

    In the current debate over auto choice insurance reform, a formidable critic of the proposal now before Congress has emerged in George Priest of the Yale Law School. Professor Priest, who carries impressive credentials as a market-oriented legal scholar, recently called the federal auto choice bill a "lemon" in a widely noticed Wall Street Journal op-ed. On September 1 he reiterated his critique in a speech delivered at The Heritage Foundation that was televised nationwide on C-SPAN.

    Professor Priest is a rigorous scholar who cannot be accused of carrying a torch for the trial lawyers whose incomes would suffer if the bill became law. But ultimately his brief against the auto choice bill is not persuasive.

    "Imagine," he writes in his Journal op-ed, "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." He then proceeds to base his entire critique of auto choice on the assumption that the world is actually divided into just these two simple categories. Priest thus places himself among those who believe that auto accidents are not really accidents. Rather (according to this view), they are preventable events that are invariably caused by someone’s "careless driving."

    By way of illustration, Priest offers the example of his own son, a "very high-risk driver," who, but for the beneficence of his parents, "would have been priced out of the [liability insurance] market, making our highways substantially safer." There are two problems here: First, Priest assumes that an inability to afford liability coverage means necessarily that one will refrain from driving. But in the real world, those who cannot afford insurance simply continue to drive. Indeed, the percentage of drivers who are uninsured is highest in traditional tort states such as California, where 28 percent of vehicles — accounting for 5.8 million motorists — are uninsured.

    More fundamentally, if Priest really believed that his son posed an inordinate risk to others, he was more than "foolish" (his word) to keep him behind the wheel by paying his insurance premium. Arguably, Priest was responsible for putting innocent people in harm’s way. One suspects, therefore, that Priest doesn’t really believe in his stark good driver/bad driver dichotomy. The truth is that relatively few drivers have either a "high risk" or a "low risk" of causing an accident. But all drivers pay dearly for an accident reparation system that richly rewards trial lawyers for legalistically assigning blame.

    Priest’s persistent use of the term "high-risk driver" is misleading in another way. For most people the term is likely to conjure an image of a dangerous scofflaw, recklessly careening from one accident to the next. But in fact, many drivers who are placed in high risk pools by insurance underwriters have never caused an accident or been cited for a traffic violation. Only the very worst drivers will have accidents with sufficient frequency to compile a driving record that indicates inordinate risk. Indeed, the riskiest class of driver — young single males who have just received their licenses — will not have had any accidents or traffic violations at all.

    Because driving history alone is a relatively unreliable predictor of future loss, underwriters must resort to feature rating. That means looking at any traits or characteristics that bear a relationship to risk. Inevitably, many nominally good drivers end up being classified as "high risk." Yet Priest, in attempting to justify the exorbitant rates charged to high-risk drivers, would have us believe that all high-risk drivers are necessarily bad drivers. That is false. Rather, the expense and capriciousness of tort-based accident reparations force insurers to adopt increasingly restrictive rating variables.

    Finally, Priest cites a flawed Canadian study to support his contention that no-fault plans fail to reduce premiums because they lead to more accidents. But the experience of the U.S. suggests that rates remain high in the thirteen states with "modified" no-fault laws (none has ever had a pure no-fault law) because their legislatures have added economic loss "thresholds," which permit suits for pain and suffering whenever a statutorily defined threshold is pierced.

    Threshold restrictions vary widely from state to state. Some thresholds incorporate a specific dollar amount that must be exceeded before a suit for pain and suffering is permitted. Usually they are set so low — sometimes at a mere few hundred dollars of medical bills — that any lawyer can get his client into court just by sending him to a cooperative doctor. Three states — Florida, Michigan, and New York — utilize verbal (as opposed to dollar) thresholds, which require an injury to be of a type specifically mentioned in the statute before a lawsuit for pain and suffering can be brought. Unfortunately, court decisions in several of the modified no-fault states have gradually eroded the effectiveness of the criteria used to determine the severity of injuries.

    Thanks to pervasiveness litigation thresholds in putatively "no-fault" states, lawsuits are often filed for any broken bone, or for inability to carry out "usual and customary" activities such as golf or skiing. Predictably, insurance premiums continue to escalate. The federal auto choice bill, it should be noted, avoids the threshold mistake common to modified no-fault systems.