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Auto Choice Reform Suffers From Two Primary Shortcomings

The current auto insurance system suffers from two primary shortcomings. First, the incentives in the tort liability system encourage accident victims to inflate their insurance claims above their actual losses in order to increase their damage awards. Unlike traditional health or homeowners insurance plans, the lawsuit-based system for compensating auto injuries allows claimants to seek payment for their non-economic losses. Absent an objective way to value such non-economic ("pain and suffering") damages, the rule of thumb is simply to calculate these losses as two to three times the claimant's economic (i.e., lost wages and medical bills) losses.3 Since pain and suffering awards are measured as a multiple of medical and wage losses, there is a powerful incentive to inflate one's claimed economic damages and pursue legal action.4

Overall, the RAND Institute for Civil Justice estimates that between 35 and 42 percent of all medical claims under auto insurance occur in response to the incentives of the tort liability system. These fraudulent claims resulted in $4 billion in excess health care consumption and $13 to $18 billion in higher auto insurance premiums in 1993.5 Following a nationwide investigation into health insurance and auto insurance fraud related to auto accidents, FBI Director Louis Freeh estimated, "Every American household is burdened with over $200 annually in additional premiums to make up for this type of [insurance] fraud."6

 The second shortcoming of today's auto insurance system is the failure to fairly compensate serious auto injuries. Despite the high price of insurance, injured victims rarely recover all of their economic losses when seriously injured in an auto accident. According to RAND, accident victims with between $25,000 and $100,000 of economic losses on average recover just 56 percent of their losses. Victims with catastrophic injuries over $100,000 recoup just 9 percent of their economic damages on average.7

The Auto Choice reform is designed to increase compensation for actual economic losses and remedy the tort system's perverse incentives.8 In essence, Auto Choice would make insurance coverage for pain and suffering optional. Drivers who want to exit the liability system's pain and suffering regime would do so by purchasing personal protection insurance (PPI). Rather than suing other drivers or their insurance companies, drivers who elect PPI would automatically be compensated for all economic losses up to policy limits by their own insurance company, without regard to fault.9 PPI drivers retain the right to sue for economic losses above policy limits. Since PPI provides insurance coverage for economic damages only, PPI drivers could neither sue nor be sued for non-economic losses, with the important exceptions of injuries inflicted intentionally or as the result of drug or alcohol use.

 Alternatively, individuals could retain the same basic rights they currently have by purchasing tort maintenance coverage (TMC) to cover accidents involving PPI drivers. Compensation for accidents involving other drivers who stay with the current system would be unaffected. For accidents involving PPI drivers, TMC policies allow recovery of both economic and non-economic losses, much as existing uninsured motorist (UM) policies currently provide first-party coverage for such accidents. Thus, the limit on recovery for pain and suffering losses caused by a PPI driver is chosen by the TMC driver.10 If losses exceed TMC policy limits, TMC drivers can sue negligent PPI drivers for all of the remaining economic loss.11 Drivers who elect the TMC option could do so at essentially no extra cost.12

Bipartisan legislation has been introduced in Congress to implement Auto Choice. In the House of Representatives, the primary sponsors of the Auto Choice Reform Act (H.R. 2021) are House Majority Leader Dick Armey (R-TX) and Representative Jim Moran (D-VA). Similar legislation has been introduced in the Senate (S. 625) by Senators Mitch McConnell (R-KY), Joseph I. Lieberman (D-CT) and Daniel Patrick Moynihan (D-NY).

If you or your loved one have been in an accident that involved a serious injury, know your legal rights by contacting the nearest Accident Attorney.

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