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Compulsory Auto/Uninsured Motorists

THE TOPIC
OCTOBER 2010

Virtually all states require drivers to have auto liability insurance before they can legally drive a car. (Liability insurance pays the other driver’s medical, car repair and other costs when the policyholder is at fault in an auto accident.) State laws set the minimum amounts of insurance or other financial security that drivers must pay for the harm caused by their negligence if an accident occurs. The public generally supports compulsory auto insurance and wants these laws enforced.

Liability insurance is compulsory in 49 states and the District of Columbia. Only New Hampshire does not have a compulsory auto insurance liability law. Laws in most states have proven ineffective in reducing the number of drivers who are uninsured. There are many reasons for this. Some drivers can’t afford insurance and some drivers with surcharges for accidents or serious traffic violations don’t want to pay the high premiums that result from a poor driving record. With the estimated percentage of uninsured drivers in the United States close to 14 percent, it is costly to track down violators of compulsory insurance laws. And unless the odds of getting caught are high and the penalties severe, drivers will continue to flout the law.

By late 2009 more than 30 states had taken steps to create online auto insurance verification systems to identify uninsured motorists, according to the Property Casualty Insurers Association of America. In addition, at least three other states had pilot programs operating. These systems require insurers to maintain up-to-date databases of insured motorists that can be accessed via the Internet by law enforcement officers instantly when motorists are stopped for traffic infractions.

RECENT DEVELOPMENTS

■The governor of Maryland signed a bill in May that increases the minimum liability limits for coverage for bodily injury or death from $30,000 for one person to $40,000 and from $40,000 for two or more people to $60,000. The changes will go into effect for policies issued or renewed after January 1, 2011.

■In West Virginia, a bill enacted March 31 authorizes the Motor Vehicles Commissioner to develop and implement an electronic insurance verification program. (See also Background, Computer Databases). According to the Property Casualty Insurers Association of America, the bill also included stronger penalties for drivers who fail to maintain the required insurance, including suspension of drivers licenses and vehicle registrations for a first offense.

■In Texas, where an online insurance verification system began operating in 2009, 22 percent of all vehicles did not have basic liability coverage as mandated by the state’s compulsory law. TexasSure, the verification program, reported these results as of November 2009. After checking with some motorists who may be in compliance but have not had their registrations matched with insurers, the Department of Insurance will send warnings to motorists who are not in compliance.

■Uninsured Motorists: A 2009 study by the Insurance Research Council (IRC) found that the estimated percentage of uninsured motorists declined nationally from 14.9 percent in 2003 to 13.8 percent in 2007. The IRC measures the number of uninsured motorists based on insurance claims, using a ratio of insurance claims made by people who were injured by uninsured drivers relative to the claims made by people who were injured by insured drivers. The study found that, as in the past, the uninsured motorist problem varies greatly from state to state. At the extremes, New Mexico had the highest uninsured motorist ratio, at 29 percent, and Massachusetts had the lowest, at 1 percent.

■There is evidence that the current economic downturn resulted in several hundred thousand drivers dropping their insurance in 2008 as the unemployment rate climbed, according to the IRC study.

■The IRC found that a single percentage increase in the unemployment rate is associated with an increase in the uninsured motorist rate of more than three-quarters of a percentage point. Based on unemployment rate projections at the time of the study (7.5 percent), the IRC projected that the percentage of uninsured motorists would rise from 13.8 percent in 2007 to 16.1 percent in 2010.

■In October 2010, the Insurance Information Institute recomputed the estimated/forecast percentages of uninsured motorists for 2010 and future years using the regression equation that the IRC used and unemployment forecasts from the Blue Chip Economic Indicators. The findings are below:

UNINSURED MOTORISTS PROJECTIONS, 2010-2014

Unemployment rate Uninsured as percent of insured
2010 9.7% 17.7%
2011 9.3 17.4
2012 8.4 16.7
2013 7.7 16.2
2014 7.1 15.7

Source: Insurance Information Institute, based on an analysis of data from the Insurance Research Council and Blue Chip Economic Indicators.

■Low-cost Auto Policies: A few states with large urban populations and high auto insurance premiums have created programs to encourage drivers to purchase coverage. In California low-cost policies are available to low-income drivers who meet income and good driver eligibility requirements. The program was originally set up in 1999 for drivers in Los Angeles and San Francisco counties. By the end of 2007, low-cost auto policies had become available to all drivers in the state. To be eligible, vehicles insured through the program must not exceed $20,000 in value. Another provision limits the number of low-cost policies to two per person. According to the Property Casualty Insurers Association of America, the number of low-cost auto insurance policies assigned during the first four months of 2008 fell by 23.4 percent compared with the same period in 2007. (See also Urban Insurance Issues.)

States may also require motorists to have physical proof of valid insurance, which is usually a card issued by the insurer. They may also require motorists to provide evidence of insurance in certain situations. For example, all but about a dozen states require motorists to have valid evidence of insurance in their vehicles at all times and to produce it when stopped by law enforcers. About the same number of states require motorists to produce evidence of insurance when they are involved in a crash or shortly afterward. About half of the states require evidence of insurance when a vehicle is registered.

Increasingly, laws are being passed that expand the role of the insurer in verifying compliance with compulsory liability laws and aiding in their enforcement. Insurance companies often work in conjunction with state motor vehicle departments to verify insurance coverage. Most states have laws that specify that insurers must notify the motor vehicle department when a policy is cancelled or not renewed. In some states, insurers are asked to verify the existence of insurance at the time that a specific accident occurred. In other states, insurers are given lists of randomly selected auto registrations, which they are asked to match up with insurance policies that the motorists claim were in effect. Newer laws, known as computer data laws, require an insurer to submit its entire list of automobile liability policies, updated at specified intervals, to a state agency such as the motor vehicle department. The state agency can use the lists to verify registration applicants' declarations that insurance is in effect. (See also Background: Computer Databases.)

Penalties for driving without compulsory insurance include fines, which can be as high as $5,000 for a subsequent offense, to license or registration suspension or revocation. Some states can impose jail time, confiscate license plates and impound vehicles.

BACKGROUND
In 1927 Massachusetts became the first state to require the purchase of auto liability insurance. Since then 48 states and the District of Columbia have followed suit. Such laws usually have the support of the public despite the fact that compliance with such laws is generally poor and enforcement activities are costly. Compulsory auto insurance laws do nothing to protect drivers involved in accidents with drivers of stolen vehicles or drivers from one of the two states where insurance is not compulsory, drivers of unregistered vehicles, the insurance dodger who cancels a policy immediately after receiving a proof-of-insurance certificate and the hit-and-run driver.

The National Association of Insurance Commissioners (NAIC) has suggested that strict enforcement of compulsory auto insurance laws, with mandatory and "significant" fines for first time offenders, may be the key to lowering the uninsured motorist population. In 1989 it identified North Carolina as having one of the highest rates of compliance at the time (96.6 percent) and one of the strictest and swiftest enforcement programs. The NAIC said the program’s effectiveness relied largely upon the cooperation of the state's insurance and motor vehicle departments, insurers, and state and local law enforcement agencies—following up on reports of insurance policy cancellations, for example, to make sure that new policies were purchased or that the license plates were turned in. Such cooperation may not be possible in states with larger metropolitan areas, where other law enforcement priorities may limit the resources devoted to enforcing compulsory auto liability insurance laws. A 2002 study from Florida State University’s College of Business also noted the positive effect of compulsory laws combined with high noncompliance fines saying that states that had this combination from 1995 to 1997 were able to decrease their uninsured motorist rates. While high fines were found to be an effective deterrent, jail time for noncompliance was not, probably, as the authors said, because motorists don’t believe that the penalty will be enforced.

Compulsory auto liability insurance is not necessarily the most effective solution. A 1994 study by the National Association of Independent Insurers (now known as PCI) found that New Hampshire, a state that does not have compulsory insurance laws, had a smaller percentage of uninsured drivers than the nearby states of Rhode Island, Vermont and Connecticut. Only 10 other states had fewer uninsured drivers. New Hampshire also had the lowest percentage of uninsured drivers—9.5 percent—of all the states without compulsory laws.

Affordability influences decisions about whether to purchase auto insurance. Risk Information, Inc. found that the 1995 Insurance Research Council (IRC) uninsured motorist rates by state, when compared with average personal auto insurance expenditures from the NAIC, points to cost, along with enforcement and culture, as factors in decisions not to buy compulsory coverage. For instance, some states such as New Jersey, New York and Louisiana have high insurance costs, especially when measured against median family income, yet their uninsured motorist rates were 12 percent or less at the time of the study. On the other hand, Alabama had an uninsured rate of 28 percent even though coverage cost much less there.

Computer Databases: Insurer verification laws mandating that all insurance companies in a state submit the entire list of their policyholders to an outside vendor or a state agency, which match them to motor vehicle registrations, are a tool to help solve the uninsured motorist problem. These systems are designed to promote compliance with the law by increasing the odds of being caught driving uninsured. At first a number of states reported having problems administering this system, which in some states had a high error rate, including “mismatch” problems. Mismatch can occur when insurers and the motor vehicle or regulation department have conflicting or erroneous records that mistakenly flag policyholders as flouting the law. By 2009, systems in such states as in Texas, Oklahoma and Wyoming were in operation after field tests showed that mismatch problems had been solved.

The Insurance Industry Committee on Motor Vehicle Administration (IICMVA) has found that state reporting systems do not effectively meet their main objective, which is to identify and track uninsured motorists. The programs are costly, difficult to implement and hard to maintain.

The IICMVA has developed an industry-supported Web service system that would create a single online verification system. A state’s Department of Motor Vehicles or law enforcement division would use a Web portal to insurer data to access real-time information about whether a motorist had insurance. The IICMVA model also established guidelines for uniformity, for example, requiring the transmission of data through Electronic Data Interchange (EDI) using a standardized format. Using this system may remedy the need to exchange massive amounts of data.

Other Solutions to the Uninsured Motorist Problem: Over the years various proposals for dealing with the uninsured motorist problem have been put forward. Unsatisfied judgment funds were set up in a few states to provide a source of funds for accident victims when the at-fault party has no means of paying a judgment, but their effectiveness proved to be limited. A more effective remedy is uninsured (and underinsured) motorist coverage that provides compensation to policyholders when an at-fault motorist has no liability insurance (or insufficient amounts) or when the at-fault motorist is a hit-and-run driver. Like unsatisfied judgment funds, this program does nothing to reduce the number of uninsured motorists but it does provide a way for individual drivers to deal with the financial consequences of accidents with hit-and-run or uninsured drivers. In about 20 jurisdictions, uninsured motorist coverage is mandatory. In other states, insurers are required to offer the coverage but a driver does not have to purchase it. Only a handful of states require drivers to purchase underinsured motorist coverage.

The price of uninsured motorist coverage varies considerably from state to state, depending in part on the percentage of drivers who are uninsured. The price is also influenced by whether the amount available to pay claims can be increased by "stacking," a practice that works to the benefit of people who own more than one insured vehicle. In states where stacking is not specifically prohibited, liability limits under the uninsured motorist coverage may be multiplied by the number of cars insured under a single policy or may be added together where multiple vehicles are insured under different policies. Thus, in a three-car family, where uninsured motorist liability limits are $20,000, in a state that does not prohibit stacking, the amount available to pay a claim in an accident with an uninsured driver would be $60,000. Because stacking drives up the cost of auto insurance, about half of the states prohibit stacking, according to the Property Casualty Insurers Association of America. However some states, such as Missouri and Pennsylvania have upheld stacking provisions.

No-fault insurance laws also provide some relief from the problem of uninsured motorists. Under no-fault auto insurance plans, accident victims can collect benefits from their own insurance companies, regardless of whether the other party has insurance coverage (see paper on no-fault auto insurance for more information).

“No Pay, No Play”: In response to public concerns that those who obey compulsory laws subsidize scofflaws, legislators in more than 20 states have proposed “no pay, no play” laws that ban uninsured drivers from suing for noneconomic damages such as pain and suffering. Eight states have enacted such laws, according to the Property Casualty Insurers Association of America. In Michigan uninsured drivers who are 50 percent or more at fault cannot collect noneconomic damages in the event of an auto accident. California's plan (Proposition 213) goes further by curtailing lawsuits for drunk drivers as well as for those who are uninsured. Louisiana’s law compels uninsured motorists to pay for the first $10,000 in out-of-pocket medical expenses and the first $10,000 in property damage before they can sue the other party. New Jersey's law, similar to California’s Proposition 213, specifies that uninsured and drunk drivers, as well as motorists who intentionally commit other crimes, may not file lawsuits for economic or noneconomic damages. These laws were upheld in New Jersey and Louisiana. A related issue was addressed in Iowa where the governor signed a bill prohibiting motorists from collecting noneconomic damages for injuries resulting from an accident if the motorist was using the vehicle while committing a felony.

Low-cost Policies: Low-cost auto policies are designed for drivers who cannot afford regularly priced auto policies or who have little or no assets to protect. New Jersey's Basic Policy offers $15,000 in personal injury protection, up to $250,000 in medical benefits for catastrophic injuries and $5,000 property damage liability. Policyholders have the option to buy $10,000 bodily injury liability coverage but they cannot buy uninsured, underinsured or collision and comprehensive coverage. The newer Dollar-A-Day policy provides emergency medical care coverage immediately after an accident and $10,000 death benefits but no coverage for liability.

California's program for low-income drivers is administered by the California Assigned Risk Program. Every auto insurer doing business in the state must take their “fair share” of applicants. Only drivers over age 19 with good driving records and low incomes (up to 250 percent of the poverty level) are eligible. Applicants must have motor vehicles valued at $20,000 or less. Rates are set in each county so that premiums are sufficient to cover losses and expenses in each county. The policy provides up to $10,000 in liability coverage for one person involved in an accident and up to $20,000 for more than one person. It also includes payment options, allowing a 15 percent deposit and six monthly installments, optional $10,000/$20,000 uninsured motorist bodily injury coverage and $1,000 medical payments coverage. The future of the program is uncertain as the governor vetoed a bill in October 2009 that would have extended the program after its scheduled expiration on January 1, 2011.

Colorado has a low-cost plan for families with incomes of up to $31,000 per year that provides a maximum benefit of $25,000 for medical expenses or personal injury protection. However, as of January 2004, insurers are no longer required by law to offer these policies.

UNINSURED MOTORISTS, 1989-2007 (1)

Year Percent
1989 16.3%
1990 15.4
1991 15.1
1992 15.6
1993 16.0
1994 15.1
1995 14.2
1996 13.8
1997 13.2
1998 13.0
1999 12.7
2000 13.4
2001 14.2
2002 14.5
2003 14.9
2004 14.6
2005 14.5
2006 14.3
2007 13.8

(1) Percentage of uninsured drivers, as measured by the ratio of uninsured motorists (UM) claims to bodily injury (BI) claims frequencies.

Source: Insurance Research Council.