Risking Choice

Auto insurance is such a mess in so many states that a few may be ready to try something drastic: giving drivers a little freedom. A bill that has been introduced in half a dozen state legislatures would allow consumers to choose between no-fault and liability insurance. Co-author Jeffrey O'Connell, the University of Virginia law professor who helped introduce the concept of no-fault insurance in 1964, says the proposal would reduce costs significantly.

The bill is a response to the complaint that mandatory no-fault systems such as those in New York and Michigan force drivers to give up their right to sue in the event of an accident. To O'Connell's dismay, that concern has led many states to dilute their no-fault systems by allowing litigation when damages exceed a certain level. Under the choice plan, drivers can either opt for less expensive no-fault coverage or pay more for liability insurance and retain the ability to seek damages in court. "The two systems will compete on both price and quality," O'Connell says.

Ken Hacker of the American Insurance Association (AIA) estimates that the plan would reduce the average premium by about 19 percent, since most people would prefer no-fault insurance if given the choice. In Kentucky, the only state with a dual system, fewer than 10 percent of drivers request liability coverage.

The choice bill has been considered in six states where insurance premiums are among the highest in the nation: California, Arizona, Nevada, Maryland, Pennsylvania, and Delaware. The legislatures in California, Maryland, Pennsylvania, and Delaware have yet to vote on the plan. The bill failed in Arizona and Nevada, but O'Connell expects it to be reintroduced. "The whole thing is getting so outrageously expensive that people are desperate to cut costs," he says.

Some people are so desperate, in fact, that they're willing to go a step further than O'Connell and abolish compulsory car insurance altogether. A key legislator in South Carolina, where residents pay a bigger share of their income for car insurance than in any other state, has given up on mere tinkering. State Rep. Robert A. Kohn, chairman of the House Insurance Subcommittee, would like to allow drivers the choice of not buying insurance at all. Eleven states have no mandatory insurance laws but restrict the types of coverage that are available. In 1987, premiums were below the national average in nine of the states where insurance is optional.

Although he does not support scrapping mandatory insurance, O'Connell recognizes the idea's appeal. "When you begin to require insurance, you get into all kinds of regulatory problems," he says. Problems like mandating arbitrary rate rollbacks, forcing the insurance industry to monitor compliance, and making good drivers subsidize bad ones through reinsurance funds.

Moreover, O'Connell says, "the tort system makes insurance so expensive that requiring it becomes impossible. People flout the law. It becomes almost a repeat of Prohibition." In South Carolina, for example, some 27 percent of drivers are uninsured. AIA's Hacker says uninsured drivers are especially common in inner cities, where incomes are low and coverage is expensive. He estimates half of Philadelphia's drivers disobey Pennsylvania's mandatory insurance law.

Despite the problems, neither O'Connell, who believes costs can be controlled by limiting litigation, nor Hacker, whose group supports an optional system, expects to see mandatory insurance disappear. One of the main obstacles: Trial lawyers are vehemently opposed to anything that might reduce their fees, and when they're not contributing to election campaigns, they're busy serving in state legislatures.