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49. Do you believe it would be impracticable, if there was a no-fault, first party system, to devise a rating plan under which those who caused the most accidents contributed most to the common fund for distributing loss while those who caused the fewest contributed loss toward such fund?
50. To such extent as the uninsured motorist endorsement covers the losses of the innocent victim of the insured of an insolvent insurer, do you believe that the subrogation rights of the uninsured motorist carrier should be restricted to only such rights as may be asserted against the receiver of the insolvent insurer?
51. We would appreciate the following information concerning your Association and its member companies for each year 1967, 1968 and 1969:
(a) Number of member companies in your Association.
(b) Names of companies and executives who were, or are, on the executive or governing committee or board of directors.
(c) Total dues and fees paid by member companies to your Association, and the method or formula used to determine those dues and fees.
(d) Number of professional and nonclerical persons employed by your Association, and total salaries paid to those persons.
(e) Amount paid or contributed in any form by your Association to the Insurance Information Institute.
(f) Amount paid or contributed in any form by the member companies of your Association to the Insurance Information Institute.
52. On page 28 of your statement you ask "for the particulars as to how the figures (in Table 1) were derived".
(a) It was assumed, that, as of December 31, 1968, all auto insurance premiums less $200 million estimated for return premiums) were earned, and all auto claim reserves, estimated to be $4 billion (less $300 million assumed to be excess, and thus underwriting profit) were paid.
(b) The $81.5 billion of "auto insurance receipts" were obtained from Best's Aggregates and Averages auto insurance written premiums. The $200 million was deducted for return premiums. "Receipts" for reciprocals were calculated by taking the ratio of auto insurance business-total insurance business, and then multiplying by each year's aggregate written premiums for reciprocals as reported in Best's Aggregate and Averages.
The $81.5 billion figure in Table 1 is the same as the $81.7 billion (less $200 million for return premium) as shown in "total combined written premiums" in Table 2.
(c) The $47.7 billion in "liability and physical damage benefits", before de ducting claimant's fees, were obtained by taking the $44 billion of paid losses as found in Table 2, and including $3.7 billion of claim reserves assumed paid ($4 billion less $300 million excess reserves).
(d) The dollar amount of total adjusting expenses (including "defense lawyers"), "agents commissions", other selling expenses", "overhead”, and “state taxes" were obtained as follows:
Stock and mutual industry expense ratios were taken separately for such of the four lines of auto insurance for each year (1959–68) from Best's Aggregates and Averages and multiplied by earned premiums (in the case of total adjusting expenses), and written premiums (in the case of each of the remaining expenses).
Because adjusting and the other expenses for reciprocals were not itemized by Best's or any other known source, and since they were found to be analogous to those of mutual companies, total reciprocal industry-wide auto insurance earned and written premiums as reported in Spectator were averaged over the 1959–1968 period, and included in Best's mutual industry earned written premiums, respectively.
Thus, dollar amount of mutual adjusting and other expenses include those of reciprocals.
The expenses obtained for stock and mutual (including reciprocal) companies were combined as to each expense item, and these dollar amounts are shown in the third column entitled "Expenses" in Table 1.
(e) "Claimants' lawyers" fees of $5 billion were estimated from studies done by bar associations, Keeton and O'Connell, and the University of Michigan.
Claimant attorneys averaged 14% of liability benefits of $32.4 billion ($28.7 billion as shown in Table 2 and $3.7 of claim reserves assumed paid) and 3% of physical damage benefits of $15.3 billion.
It should be pointed out that $0.4 billion was included by mistake in "net physical damages" instead of "net liability benefits" in the column entitled “Auto Insurance Benefits to Claimants". "Net physical damage benefits" should be $14.8 billion and "net liability benefits should be $27.9 billion.
(f) “Defense lawyers" fees of $5 billion were estimated from uncollected loss adjustment expense data as reported by the rating organizations and some of the larger independent rate filing companies.
(g) Auto insurance investment and underwriting profit were calculated from Best's Aggregates and Averages. Reciprocal underwriting profit was estimated to be $500 million for the period, 1959–1968. (See Tables 1 and 3 attached to Professor Dennis Reinmuth's enclosed prepared statement to this subcommittee.)
Formula used :
Net investment income+realvestment and underwrit
• auto premium ized capital gains+unrealized ing profit after taxes=
x capitals gains-0.25—(Federal for The period 1964 total premium
income taxes +policyholder di1968
vidends) If you find you do not agree with the data presented in Table 1, we would be only too pleased to receive your version of where the public's auto insurance premium dollars went from 1959–1968. Please show all assumptions, computations and sources.
We are grateful for your cooperation and would appreciate receiving the requested information in this letter by February 20, 1970. Sincerely,
PHILIP A. HART, Chairman, Antitrust and Monopoly Subcommittee.
STATEMENT OF MARK MARTIN, CHAIRMAN OF THE BOARD, DEFENSE RESEARCH
INTRODUCTION As the Chairman of the Board of the Defense Research Institute, I am pleased to submit the following statement for consideration by the Subcommittee in its investigation of the so-called "Automobile Accident Reparation System.” I regret that the scheduled appearance before the Subcommittee by myself, other officers and staff members of DRI, and representatives of the International Association of Insurance Counsel, Federation of Insurance Counsel and Association of Insurance Attorneys had to be canceled because of the press of other Senate business. However, we welcome the opportunity to present this statement for your consideration and would be happy to receive further inquiry from you should you see a need for additional dialogue.
The Defense Research Institute is a national, non-profit organization with almost 6000 members, headquartered at Milwaukee. The great majority of them are trial lawyers who come from all fifty states, Puerto Rico and the provinces of Canada. These lawyers engage in the defense of civil lawsuits and, in turn, are members of firms which comprise over 20,000 lawyers in those areas.
The Defense Research Institute was organized in 1961 to promote improvement in the administration of justice and enhance the service of the legal profession to the public. We have sought to carry out these objectives.
LEGAL VERSUS INSURANCE PROBLEMS Our interest in what has come to be called the "Automobile Insurance Reparation Controversy” arose at the inception of the discussion and debate of the subject. We quickly discovered that the matter had many facets which some persons tended to confuse and group together. In addition to questions relating to the operation of the legal system involved in the auto reparation process (the tort liability system), there were also questions relating to insurance marketing, underwriting, rating and the like. Because these areas are so vast and complex and because our expertise is concentrated in one specific area, we limited our work to a study and analysis of the problems which were claimed to involve the operation of the present legal system. We decided to consider problems involving the business aspects of the insurance industry only as they relate to the tort system. Therefore, my statement will be concerned only with the operation of the tort liability system and those matters outside the system which affect it.
LEGAL QUESTIONS RELATING TO THE REPARATION SYSTEM Many problems and criticisms have been placed at the door of the tort liability system. Some claim that all problems, even those related to the business aspects of insurance, would disappear-the millennium would be reached-if the tort liability system were abolished. They claim that the public is dissatisfied with the tort system and would prefer some sort of no-fault approach. We believe the solution to all of these problems is more complex. We doubt that the public's attitude on such complex issues can be gauged by the results of over-simplified opinion polls that ask whether a less costly system, free of red tape and delay, would be preferred over the present system. The tort system is based upon the principle of individual responsibility—that a person causing damage to another by careless or intentional conduct should see to it that the loss is in some way compensated. If anything is certain, it is that there has been a re-emphasis in this country of public desire for personal responsibility and accountability.
No public opinion polls are needed to know that the public wants a system that is free from excessive expense, delay and inequity. The tort liability system has been criticized for alleged excesses in each of these areas. Our research was therefore directed to determine the validity of those criticisms and the best means to correct problems which were actually found to exist.
It has been claimed that persons involved in motor vehicle accidents must wait many months and even years before compensation is received for the injuries and damages that are suffered. This is attributed to the tort system and the rules of practice and procedure involved in its application,
However, our research of this claim has shown that 94% of auto liability claims are settled without a suit ever being filed and that only one-third of the remaining 6% (2% of the total) are tried to a verdict without being settled in some other way. Therefore most auto liability claims never reach the courts.
It is also demonstrated that these claims that do not reach the courts are settled promptly. Figures from one source show that 68% of claims are settled within 3 months; 81% within 6 months; 86% within 9 months; 89% within 12 months; 93% within 18 months; and only 7% taking more than 18 months to settle. Other sources show similar results.
It must be noted carefully that the delay in the settlement of a liability claim does not necessarily mean that the claimant will suffer economic hardship. Most Americans receive payments for the economic loss normally associated with automobile accidents (medical and hospital expenses, wage loss, auto physical damage) through first party insurance and benefit programs which are not connected with the operation of the fault system. For these persons promptness of the payment of duplicate benefits from any auto reparation system is relatively unimportant. This is demonstrated by the experience that the American Mutual Insurance Alliance had in experiments with its Guaranteed Benefits program. This is a plan which offered a claimant the option of seeking his normal tort recoveries or taking limited first party benefits in their stead. A reluctance on the part of many of the claimants to give up the right to seek tort recoveries in exchange for the no-fault, no-delay, no-red tape Guaranteed Benefits was found. One of the reasons ascribed for this reluctance was that the claimants were in no hurry to settle their claims since their out-of-pocket losses were covered by other non-auto insurance plans.
What of delay in our courts? When debate as to the merits of the present reparation system began, its critics made statements interpreted as meaning that long delays in the courts affected almost every litigant in almost every jurisdiction throughout the country. The typical claim was that there was an average delay of two and one-half years. The reason for this delay was said to be the auto accident case and impression was given that if these cases were eliminated congestion would soon disappear.
We set out to determine the validity of these allegations and conducted two surveys to determine the true status of backlog in the country's courts. We found that far from affecting ever court and every litigant, delay was limited to a small number of metropolitan jurisdictions. Admittedly this involves a large number of people. Other studies have shown that auto accident cases take up only a small percentage of the judicial time. The real culprit of court delay was found to be an increase in all judicial business and the failure to increase the number of judges and court facilities to keep apace with population growth. In Manhattan and the
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Bronx in New York, for example, not one new judgeship was created for 43 years prior to 1968. However, the courts in other areas of large population density have no delay since there are provisions for the creation of a new judgeship based upon an incease in the population.
Another of the major criticisms of the present auto reparation system has to do with the cost of its operation. The statement: "I'm paying too much for my auto insurance" is heard quite often. However, we also hear similiar statements with regard to the cost of food, housing, services, interest rates, taxes and many other items in the typical family budget. The fact is that inflation has been no stranger to the cost of auto insurance or to the cost of all other consumer goods and services. In fact the cost of many of these items has risen much more sharply than have insurance premiums. There is no question that some persons pay very high insurance rates. However, statistics issued a short time ago showed that the average annual premium paid by motorists in the United States for $10,000/ 20,000/5,000 was only $79.64. It is not uncommon to find persons paying more to park their cars for eight to ten hours a day, five days a week than they pay for auto insurance protection which is in force twenty-four hours a day, seven days a week.
The impact of inflation upon auto insurance rates is more noticeable because the premium is paid once, or possible twice, a year. Twelve dollars added to a yearly bill which was previously sixty dollars creates more of an impact in the mind of a person paying it than does one dollar added to a monthly bill that was previously five dollars. However, the annual increase is just the same. The fact remains that auto insurance is not the most costly item of expense associated with the operation of a motor vehicle. A study conducted by the Bureau of Public Roads showed that the cost of gasoline and oil (excluding taxes), garages, parking and tolls; maintenance, accessories, parts and tires, and depreciation each exceeds the cost of insurance. Yet, the cost of these items is spread out through the year and insurance is purchased in one or two installments.
With all the discussion and debate over the high cost of the reparation system, sight is often lost of the fact that the typical automobile insurance premium includes charges for more than liability coverage. Most motorists now carry medical payments, collision and comprehensive, and uninsured motorist protection as well as their normal liability coverages. Yet, the typical premium payer tends to view his automobile insurance bill as an indivisible whole.
Only recently has real consideration been given to the most costly item in the automobile insurance premium statement. Recent testimony before this committee has demonstrated that the cost of coverage for damage to motor vehicles has been increasing at a rate more rapid than the coverage for personal injuries. One recent report indicates that over two-thirds of the typical automobile insurance premium is spent for coverage for physical damage to vehicles. A change in the method of compensation for the present system to some nofault plan would have no effect on the cost of repairing motor vehicles.
Our studies of the matter of insurance costs have shown that there are two basic reasons for the increase_inflation and rising accident tolls. We believe that any proposals for change or modification of the present system must, of necessity, take these two factors into consideration. Any plan for change which seeks to lower costs by merely redistributing benefits and which does not take these two factors into consideration, will produce only artificial cost reductions which will be dissipated as inflation and accidents continue.
INEQUITY Some claim that the present tort system is inequitable since some persons injured in motor vehicle accidents receive no compensation. The tort system is not intended to compensate everyone. The system is based upon the principle that one who causes injury to another by careless or intentional conduct should fairly and adequately compensate the injured person. This principle is deeply engrained into the basic ethic of our civilization. Over the years the application of this principle has been strengthened, rather than limited, as various rules and procedures in the law which prevented its application have been stripped away. The trend has been to extend the principle of liability based upon fault to persons and organizations previously immune rather than to create more immunities. This ability of the tort system to modify in accord with society's needs is one of its most valuable characteristics.
It is true that there are persons who do not recover under the tort system because they are unable to trace their damages to the fault of another. Whether these persons should receive some form of compensation is a question of social policy and not legal policy. However, the nature of this problem must be carefully studied to determine its exact magnitude. We believe that in attempting to solve the problem, to whatever extent it actually does exist, the basic legal rights of those persons who can gain recovery under our present legal system should not be abrogated. If basic legal rights are destroyed in the name of social expediency, all men will eventually be the losers.
NO-FAULT PLANS AND PROPOSALS In addition to studying the problems which have been attributed to the operation of the present tort liability system, we have also analyzed the proposals which have been proffered as claimed solutions. Some assert that what is needed is drastic change. They claim that the present system cannot be improved sufficiently to alleviate the problems to any significant extent. What has been proposed are forms of no-fault, first party insurance coverages under which each person injured in an automobile accident would look to his own insurer for benefits. It has been claimed that such no-fault proposals would result in the prompt payment of claims, reduced insurance costs and more equitable treatment of claimants. We have carefully studied these plans and proposals to determine if they would produce the results which their proponents have claimed.
SPEED IN PAYMENT
The first advantage claimed of no-fault proposals is speed in the payment of claims. It has been asserted that the adoption of no-fault would result in a system under which all claims would be promptly paid without red tape, similar to the manner in which fire and health insurance claims are paid. While this is what proponents of the plans intend, there is no question that disputes between insurers and insureds would arise, resulting in litigation. Practices and procedures for resolving these disputes are written into two of the most widely publicized plans-Keeton-O'Connell and the American Insurance Association plans. A considerable amount of litigation presently arises under the medical payments provision of the standard auto insurance policy. This is first party, no-fault insurance.
Therefore, even though no-fault plans are designed to reduce delay and speed payment, all claims would not be promptly paid. There is no way to determine whether more claims would be paid promptly under a no-fault plan than under the present system or whether there would be more or less litigation. However, as was previously noted, the majority of claims are now settled promptly and without litigation. In addition, since most Americans presently have non-auto, first party insurance and benefit plans which duplicate the type of benefits offered under a no-fault system, there is a serious question as to whether prompt payment of duplicate benefits is really wanted or needed.
CLAIMS OF REDUCED COST
One of the most significant claims made for the advantage of adopting a no-fault auto insurance proposal is that the cost of insurance to the public would be reduced.
As lawyers, we do not claim to have the knowledge of insurance actuaries. We must rely upon the studies of others to ascertain the facts of this matter. Proponents of two of the most widely discussed no-fault proposals—the KeetonO'Connell and American Insurance Association plans-have claimed that insurance costs would be lowered if such plans were adopted. However, other actuaries have studied the same proposals and have asserted that insurance costs would not be reduced ; instead even higher insurance costs might result. As lawyers, we do not presume to assert that one set of actuaries is correct or that the other is wrong. All that we can ascertain from this matter is that a serious difference of opinion exists. This alone should be reason for serious reflection. No one knows better than members of the legislative branch that the cost of many projects and proposals, conservatively estimated before implementation, have ballooned all out of proportion when practical application is attempted.
There are observations as to the cost of no-fault we can make which do not require the expertise of an actuary. The first and most obvious is that an in