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American Insurance Association, 85 John Street, New York, N.Y. 10038

This report is the result of a year-long study by a special committee of the American Insurance Association which had as its purpose the analysis of present problems and dissatisfaction with the existing system of automobile insurance, and the analysis of modifications and alternative systems which might better meet the needs of the motoring public and the insurance industry.

The report and attending cost study were approved by the Executive Committee of the Association at a meeting in New York on September 24, 1968.

At the direction of the Executive Committee, the committee report and cost study are being released in the public interest.

The staff of the Association gratefully acknowledges the painstaking and dedicated efforts of all those who participated in the work of the special committee and in the accumulation of the survey data that serve as the foundation of these findings.

T. Lawrence Jones

October 21, 1968

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September 9, 1968

Report of American Insurance Association's Special Committee to

Study and Evaluate Keeton-O'Connell
Basic Protection Plan and Automobile Accident Reparations

This committee was formed pursuant to a motion adopted by the Executive Committee at its June 27, 1967 meeting, which described the committee's assignment as follows: "... to undertake an immediate study of the KeetonO'Connell plan for use in legislative work, and that such study should include possible proposals for modification of such plan and consideration of proposals or methods for the indemnification of victims of automobile accidents which

might better meet the needs of the public and the industry."

The committee held its first meeting in October, 1967 and since that time has convened approximately on a monthly basis. Numerous meetings also have been held by a subcommittee on costs, a subcommittee of actuaries, and other subcommittees. Interim reports on the committee's deliberations were submitted to the Executive Committee on December 19, 1967, February 27 and July 23, 1968.


The present automobile liability insurance system is adapted Some studies reveal that the present system tends to pay to the requirements of tort law and in theory pays nothing too much for minor, even trivial, injuries and too little for to persons injured in automobile accidents unless the liability serious economic losses. Under the adversary system of trial of an insured has been established, in which event payment to and settlement, it is possible that a seriously injured person the injured person is made by the insurer on behalf of its may receive substantially less than his economic losses resultinsured. Increasingly the charge is being made that this sys ing from an automobile accident. On the other hand, the tem is not responsive to today's social, economic and tech present system tends to allow inflated settlements of relatively nological conditions involving use of the automobile and is minor claims in order to avoid the risk of litigation in need of substantial change. The committee identified and Another aspect of the present system's inequity is the high analyzed the principal criticisms and dissatisfactions relating cost of automobile insurance for persons living in congested to the existing system and its findings in this regard are dis urban areas. This congestion, coupled with the random nature cussed in this part of the report. It is the committee's con of loss severity under the tort liability system, produces higher clusion that the system is not working satisfactorily and is than average accident frequency without any compensating unlikely to do so in the future. The committee's recommended relief from loss severity. program for an improved automobile insurance system is set forth later in the report.

The system is slow.

Delay in the alleviation of economic hardship is almost The system is incomplete.

inevitable due to the settlement process under the present Because it is tied to tort law, the present automobile in tort-insurance system which requires a determination of facts surance system necessarily denies recovery to many persons not easily developed and an evaluation based upon these facts injured in automobile accidents. In actual practice, however, of legal responsibility. Although only a small fraction of the the rules of negligence are not applied as they are written and cases are actually tried, payments in the non-litigated cases many more claimants recover than would be expected sta are subject to bargaining and often must await the comtistically. Despite such flexibility in the administration of promise resolution of factual disputes, Where there is serious tort law in the automobile field, there is no escape from the economic loss, the delay in reaching settlement may be exfact that the present automobile insurance system provides a tended. Court congestion, where it exists, aggravates the partial and incomplete answer to the problem of reparations problem. Although experiments with voluntary advance payfor injuries sustained in automobile accidents. If our auto ments prior to final settlement or trial have been generally motive society is demanding a broad-gauged automobile rep successful, in the nature of the case such techniques can proarations system, as appears to be the case, the present system vide only a partial solution to the problem of delayed reparais insufficient and will require radical change.

tions in automobile accident cases. The system is inequitable.

The system is expensive. From the viewpoint of the public in evaluating the system Perhaps the most telling economic criticism of the present as an efficient and equitable means of distributing the cost of automobile insurance system is the comparison often made automobile accidents rather than protecting individuals from that $.45 is received as a benefit by claimants out of the autothe financial consequences of their own negligence, the present mobile bodily injury liability premium dollar, whereas $.67 system is inequitable both in terms of benefit distribution and of the workmen's compensation premium dollar is received cost distribution.

by claimants and at least $.90 in benefits is received out of The committee expresses grateful appreciation to Professors Robert E. Keeton and Jeffrey O'Connell for the scholarly analysis of the automobile accident reparations problem contained in their comprehensive study, Basic Protection for the Traffic Victim, Linle, Brown & Co., 1965. In the committee's opinion this is a landmark work.

the group accident and health premium dollar. The difference is in part due to the relative complexity of the fault determining and settlement process. Inevitably, there is increased hostility to the expense of the automobile insurance system and mounting criticism of the automobile insurance industry. Under present and foreseeable conditions, including inflationary pressures, the trend toward higher automobile insurance premiums - and increased public dissatisfaction — will continue.

in order to present the most “advantageous" testimony for their claims. This cynical approach is socially undesirable and subverts the purposes of insurance. It also adds substantial and unnecessary costs to the present system. The system produces serious underwriting losses.

It is hardly necessary in this report to comment on the lack of profitability in the present automobile insurance system. Even where annual rate increases have been granted, the automobile insurance business has continued to show serious underwriting losses on an industry basis. Despite solid evidence of downright rate inadequacy in many states, further rate increases are being bitterly resisted by the public and by state regulatory officials exercising prior approval power. The future is not difficult to forecast: mounting losses aggravated by continued public dissatisfaction with the present system.

The system invites exaggerated claims.

By affording payment for non-objective damages such as pain and suffering, the present tort-insurance system invites dramatization and exaggeration of automobile accident injuries. Truth is easily lost sight of in this process and claim ants are subject to inducements to color or distort the facts


by private companies, but the insurance is then primary to the government insurance. Optional additional insurance for

The criticisms discussed in this report are not of recent origin. They have existed and persisted for a long time but with increasing intensification in the past few years. In response a variety of reforms have been suggested. The Columbia Plan

The Columbia Plan (1932) proposed an auto compensa tion system with a schedule of benefits for out-of-pocket losses, similar to workmen's compensation. The insurance would be compulsory, there would be no compensation for pain and suffering, and no recovery in tort for automobile inflicted bodily injury would be allowed. The Columbia Plan never became law.

Saskatchewan Law

The Province of Saskatchewan, which has a government medical care program, in 1946 enacted a low-level benefit compulsory Coverage for compensation in cases of death, medical expense and loss of income arising out of automobile accidents. A crown corporation (Saskatchewan Government Insurance Office) supplies these basic benefits which are payable without regard to fault. The Government Insurance Office also issues compulsory bodily injury and property damage liability insurance for a $35,000 limit, bodily injury claims having priority to the extent of $30.000. In addition, the S.G.LO. writes comprehensive physical damage insurance, including collision, with a $200 deductible for private passenger cars. This coverage is also compulsory.

Under the non-fault personal injury compensation coverage, weekly indemnity is provided for a maximum of 104 weeks at $25 and at $12.50 for a similar period for partial disability. The maximum death benefit is $5,000 for a primary dependent and $1,000 for a secondary dependent, with a maximum of $10,000 for one death. Dismemberment benefits are provided up to $4,000. There is a supplementary allowance of $2,000 for out-of-pocket expenses. Benefits are deducted from any liability award

The non-fault personal injury compensation coverage is written only by the Government Insurance Office and cannot be obtained from private insurance companies. The compulsory liability and physical damage coverage may be written

be written by the S.G.I.O. and also by private companies. Puerto Rico Law

The Saskatchewan Plan is especially relevant to the committee's study, since the Commonwealth of Puerto Rico enacted a similar law this year. Under the Puerto Rico law compensation is paid to persons injured in automobile accidents, regardless of fault, through a monopolistic commonwealth fund. All medical costs are covered. There is a maximum benefit of $5,000 for dismemberment, and for other injuries the scale is 50% of salary with a $50 maximum for 52 weeks and a $25 maximum for the next 52 weeks. Common law actions are not barred but the party responsible has immunity to the extert of recovery under the act. Immunity does not apply where recoverable loss exceeds $1,000 for suffering, physical and mental, including pain, humiliation and similar damages, nor where damages exceed $2,000 for other injuries. During the first year each motor vehicle registrant will be charged $35 for this coverage. $1.000.000 is appropriated to administration as initial capital.

This report will not cover all the proposed alternatives to the present system. It will outline some of the programs which have been suggested recently. INA Proposal

A program suggested by the Insurance Company of North America would make mandatory that, as a prerequisite to registration, car owners purchase a first party direct benefits coverage applicable to all occupants of the insured vehicle and to all persons injured by the insured vehicle except occupants of another car. It would also require this policy to include tort liability coverage. First party coverage would apply to reasonable hospital and medical expenses, extra expense incurred as a result of accidental injury, and loss of income. Pain and suffering awards would be permitted in amounts to be determined in each case by a medical panel.

An insured would be permitted to select deductibles and co-insurance applicable to his family, subject to designated maximum limits. A limit of $15,000 per person on the first party coverage would apply with a minimum single limit of $25,000 for the liability coverage. At the option of the insured the law would permit a reduction in premium with respect to collateral source recoveries available to the named insured and his family. The plan would provide no tort liability exemption. The insurer which had supplied the first party benefits would be subrogated to the claim of the insured to the extent of benefits paid. Inverse Liability

The so-called inverse liability plan should also be noted.* Under this plan the insured would be reimbursed by his own insurer for out-of-pocket losses as incurred, regardless of fault and without regard for collateral sources. His insurer would be subrogated to the rights of the insured against the tortfeasor, if any. An insured could, if he wished, elect to pursue his rights against the tortfeasor, in which case he would forego his claim against his own insurer. Inverse liability is not a mandatory system but its author recommends that the first-party coverage be sold as an indivisible package with tort liability coverage and sold in the same limits as the liability coverage, with optional deductibles. The plan, as we understand it, does not attempt to reimburse on a firstparty basis for disfigurement, dismemberment, and other physical impairments except to the extent that they are related to economic loss. The inverse liability plan relates only to bodily injury or death and does not extend to damage to property. AMIA Guaranteed Benefits Plan

The Guaranteed Benefits Plan has been developed and

sponsored by the American Mutual Insurance Alliance. The plan in which several member companies are participating assumes that the present uncertainties associated with the tort liability system of compensating motor vehicle accident injuries are not in the public interest and that the public has recognized this. It is an experiment "to test whether automobile accident victims would prefer to exchange these uncertainties for the assurance of a known recovery."

The plan is viewed by its sponsors as an extension of the advance payment practice. However, unlike advance payments which still are confined to certain cases, guaranteed benefits would be offered in all clear liability cases and in questionable liability cases. Another difference is that the advance payment system requires no commitment to forego legal action. Under Guaranteed Benefits, only medical payments will be made without such a commitment; other benefits will be paid only after an oral promise not to commence a liability suit.

Medical benefits limits are $5,000 per person and are payable regardless of collateral sources. There are a series of additional benefits (basic disability, loss of services, supplemental disability, medical impairment and survivor's benefits) having an overall limitation of $7,500 which, together with the medical benefits up to $5,000, places an aggregate limit of $12,500 as the maximum available under the Guaranteed Benefits Plan

. The author of this plan is Mr. James B. M. Murray of Montreal, Quebec. The initial version of the plan appears in the Proceedings of the Casualty Actuarial Society, Vol. LIV (1967). pp. 94.114.


Early in the committee's deliberations, it was concluded that certain basic principles reflecting a model reparations system should be established as working hypotheses in analyzing alternatives and in constructing a comprehensive automobile accident injury reparations system.

These principles can be summarized as follows:

1 Fault is not a proper factor to determine reimbursement for motor vehicle accident injuries,

2. Pain and suffering are not susceptible of objective measurement and should not be included in a reparations system.

3. The cost of motor vehicle accidents should be borne by motorists.

4. Any system should be operated by the present automobile insurance industry and afford it an opportunity to realize a reasonable profit.

5. Any alternative system should cost less than the present system and should provide persons injured in auto accidents with a higher proportion of the insurance premium dollar.

With respect to the Columbia Plan or the workmen's compensation approach, the committee believes that the third party nature of the workmen's compensation law is not a practical method for dealing with traffic accidents reparations.

Also, the difficulty of replacing the present system with a schedule of benefits is obvious.

The Saskatchewan and Puerto Rico laws obviously are completely incompatible with the committee's basic conclusion that reparations for traffic accident injuries should be the responsibility of the automobile insurance industry which can perform this function most economically and efficiently.

The INA proposal makes a compromise with the proponents of tort liability by not providing a tort liability exemption. This would mean that in all accidents companies would have to continue costly claims investigations. Subrogation suits contemplated by the plan might maintain the high cost of the present system. Mainly for these reasons the committee does not recommend the INA proposal.

What has been said with respect to the INA proposal applies even more to inverse liability. It would be quite costly and therefore unacceptable. It would also fail to eliminate many of the deficiencies associated with the fault method of determining recoveries for automobile accident injuries.

Guaranteed Benefits is, of course, an experiment -- a pilot study of claimants' attitudes and not an ultimate reparations system. The committee believes the results of this experiment will be helpful in understanding public attitudes.

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