Crash Cash

Hit Me—I Need the Money!: The Politics of Auto Insurance Reform, by Marjorie M. Berte, San Francisco: ICS Press, 195 pages, $18.95

A year ago I rear-ended a car that stopped suddenly in front of me on a rainy day. Pulling over, I was relieved to find that the other driver was fine and there was no visible damage to his car. (I had been moving at a few miles per hour when we collided.) As we exchanged information, however, he told me that his passenger thought "he might have bumped his knee." Apparently, the passenger later decided he had bumped his knee, because he called a lawyer and filed a claim with my insurance company. The driver also subsequently discovered damage to his car; he called the same lawyer.

As Marjorie Berte notes in Hit Me—I Need the Money!, some people make a living doing this sort of thing, especially in Southern California. They'll stop short in front of a hapless motorist, or deliberately run two cars together, or simply invent the accident entirely. I don't think the fellow I ran into was a professional. For one thing, he initially forgot to ask for my policy number and the name of my insurance company. He seemed willing to let things slide. It was only later that he realized he had won the lottery.

But as her title suggests, it's really this less-dramatic phenomenon, and the system that encourages it, that Berte is concerned about. After all, better police techniques could conceivably nail those who stage or fake accidents for money. In any case, only a small minority of people are willing to engage in such blatant fraud. Many more, however, are prepared to invent or pad a claim once an accident has occurred. The cost is minimal, the risk of punishment is negligible, and a host of interested parties—attorneys, doctors, mechanics—are ready to help. This smalltime stuff—sprains and strains, dents and dings—is hard to catch, and it adds up.

More to the point, Berte argues, such endemic abuse is symptomatic of a sick liability system that pushes up premiums for the many to fund windfalls for a lucky few, that rewards malingerers and punishes victims of serious accidents. Her main prescription—no-fault insurance—is more than 20 years old, but she argues convincingly that it hasn't expired yet. More important, she brings a market-oriented approach to an area where the most conspicuous activists seem to be ignorant of economics.

Self-styled consumer advocates from New Jersey to California depict insurance companies as both appallingly greedy and hopelessly inefficient. Money is the insurers' only motivation, yet they waste it on unnecessary expenses and throw it away by engaging in irrational discrimination. Since the profit motive will never lead insurers to provide good service at reasonable prices, the activists argue, they must be compelled to do so.

Berte patiently exposes the fallacies in such reasoning, explaining how competition works in the insurance market and how regulation has hurt consumers. "The business is competitive by all measures of competition applied by economists and analysts," she notes. "Competition is the consumer's best guarantee that companies will operate as cost efficiently as possible."

Berte describes the regulatory disasters in Massachusetts and New Jersey and notes that Proposition 103 points California in the same direction. "The authors of the proposition completely ignored the underlying cost of claims," she writes. "What really drives up insurance rates is the ever-increasing cost of medical care, legal expenses, car repairs, fraud and theft.…The lesson from these three states' experiments is that political solutions that seek to manage rates rather than costs will continue to fail and should be rejected at the outset."

Berte's book is readable and easily digested, but it could easily have been shorter. Especially in the last few chapters, it's padded with repetition and laundry lists of generally banal suggestions—for example, "Enact tough legislation and penalties to deal with thieves"—for controlling the cost of car insurance. Some of the proposals are worse than banal. In her single-minded pursuit of lower premiums, Berte endorses sobriety checkpoints, a ban on radar detectors, mandatory seat-belt and motorcycle-helmet laws, and stricter safety standards for automobiles (maybe consumers can use what they save on their insurance premiums to cover the increase in car prices). Trying to be comprehensive, she engages in overkill.

Berte departs from a free-market approach in other ways as well. She condemns price controls but adds: "Rate regulation is essential, however, to ensure that rates are fair for all types of consumers, that rating schemes are not unfairly discriminatory, and that rating and underwriting practices of insurers are reasonable." This contradicts what she has told us about the havoc caused when bureaucrats try to impose their notion of fairness on a competitive market.

The early chapters of the book are stronger. Here Berte offers her indictment of the liability approach to car insurance, bolstering her case with statistics from numerous industry studies. For example, she notes that 38 percent of car-insurance revenue pays for injury claims. Of that, 29 percent covers noneconomic damages (mostly pain and suffering), and 26 percent pays for lawyers' fees. A recent study by the Insurance Research Council found that the ratio of personal-injury to property-damage claims—a rough measure of the propensity to file injury claims—increased about 30 percent during the 1980s. Between 1977 and 1986, attorney involvement in injury cases went up 60 percent. Although the average total settlement is higher in cases involving attorneys, the average amount going to the accident victim is actually lower. A few hit the jackpot, but most do not.

Instead of this perverse, unreliable system. Berte recommends a "guaranteed benefits" (a.k.a. no-fault) approach, which would offer quicker (though sometimes less generous) compensation to every policyholder. She explains why, despite a track record of more than two decades, no-fault is still so controversial: Strictly speaking, no state has ever adopted a no-fault system, which would do away with car-accident liability entirely. In states where guaranteed benefits were simply tacked on to a liability system, costs went up. But states that place significant limits on lawsuits have had considerable success at slowing premium growth.

Berte argues that states should set high thresholds for lawsuits, along the lines of those in New York and Florida, where accident victims can sue only if they're seriously injured. She would also restrict suits for property damage, which have so far escaped no-fault limits. She makes a persuasive case that such a system would be cheaper and, at least by her standards, more efficient.

But Berte's attempt to address the moral issues associated with no-fault insurance is half-hearted. The moral argument for restricting liability rests on the premise that most drivers who are judged to be at fault for accidents are not guilty of the sort of negligence that the civil courts are supposed to address. In this light, no-fault is not insurance reform so much as tort reform; it would tighten the legal definition of negligence.

Therefore, the question of whether an accident belongs in court should not hinge, as Berte recommends, on how much damage or injury it causes. It's possible to imagine a very serious accident caused by external circumstances—ice or debris on the road, for example—or a conjunction of small errors by both drivers. Conversely, clearly negligent behavior—say, speeding through a red light or going the wrong way down a one-way street—might result in a minor accident.

Berte does not grapple with these issues. But she does correct several misconceptions about car insurance, and she makes it clear that more regulation is not the answer.

Jacob Sullum is associate editor of REASON.