CPCU Chapter 2

Modified no-fault

About half of the states with no-fault plans have a modified plan. This places some restrictions on the right to sue, but doesn't completely eliminate it. With modified plans, victims can collect economic losses from their own insurer through mandated PIP benefits, such as medical expenses and lost wages. Victims can also sue at-fault drivers for any economic losses that exceed their no-fault coverage limit. In addition, victims can sue for noneconomic losses, such as pain and suffering, emotional distress, and disfigurement. Of course, this only applies if a victim's injuries exceed a threshold stated in the law. The threshold can either be monetary or verbal. So, what are monetary and verbal thresholds? Monetary is the dollar limit for medical expenses that victims need to exceed, while verbal is the designated criteria set forth within the statute that limit a victim's right to sue.

Financial responsibility laws are legislated to ensure drivers have the ability to pay for damage or injury they may cause. They require drivers to provide proof of this ability, such as liability insurance, and failure to do so can result in suspension of a person's driver's license or vehicle registration. The proof of responsibility is required in these conditions:

After an auto accident involving bodily injury or property damage exceeding a certain dollar amount; After a conviction for certain serious offenses, such as drunk or reckless driving, or after a driver loses his or her license because of repeated violations; and Finally, upon failure to pay a final judgment that results from an auto accident.

Assigned risk plans

All auto insurers doing business in a particular state are assigned their proportionate share of high-risk drivers, which is based on the total volume of their auto insurance written in that state.

Assigned risk plans usually have these common characteristics:

Applicants have to show that they can't obtain their own insurance in the voluntary market, usually within a certain number of days, such as 60. The minimum limits offered are at least equal to the state's financial responsibility or compulsory requirement. Certain applicants may still be ineligible for coverage, such as someone who doesn't have a valid driver's license, or someone who has had a felony conviction within the past 3 years. And premiums are normally higher than those in the voluntary market.

States have developed residual market programs for high-risk drivers, including:

Assigned risk plans, Joint underwriting associations, or JUAs, and Other programs.

Disadvantages of no-fault

First, auto premiums haven't decreased much, and in some cases, they have increased in no-fault states. No-fault plans may penalize safe drivers. The rating system used can allocate accident costs to drivers who aren't responsible. No-fault benefits don't include payment for pain and suffering. Medical expenses and lost wages may not always represent a victim's true loss. And, finally, no-fault plans may increase fraud and lead to higher costs for all. Some physicians, lawyers, and other professionals abuse the system by inflating fees charged, or charging for unnecessary services and procedures so that state monetary thresholds are exceeded.

What actions were put in place due to disadvantages of compulsory insurance

First, low-cost auto insurance. This is intended to decrease uninsured driving by making minimal liability coverage available at a reduced cost. Second, the "no pay, no play" law. This bans uninsured drivers from filing lawsuits for noneconomic damages, such as pain and suffering. Last, unsatisfied judgment funds. This action provides a source of compensation when the at-fault driver can't pay the judgment against him or her.

Advantages of no-fault

First, no-fault plans remove the need to determine fault, which can be very helpful when more than one driver has contributed to the accident. They eliminate inequities in claim payments. Under tort, even small claims could be overpaid, and serious injury claims could be underpaid. They expand the limited scope of the tort system. For example, if there are multiple people injured, or beneficiaries of those killed, they may not collect for their full economic loss under tort processes. Next, they decrease the proportion of premium used for claims investigation and legal costs. Compare this with tort, where a steep portion of the liability premium is used to pay attorneys, investigation fees, and other expenses of determining fault. Finally, because no-fault plans limit the number of lawsuits, the burden on the courts is reduced, as well as overall costs. Claim payments can be made quicker because settlements do not take place in court with lengthy trials.

Pure no-fault

For pure no-fault, victims don't need to establish fault or prove negligence in order to collect payment for their damages, regardless of severity. This eliminates tort liability for bodily injuries; however, no state has yet enacted a pure no-fault system.

What is the major advantage of tort liability

It provides a remedy for victims of negligent drivers who cause accidents. Injured victims are reimbursed for their costs, and the costs are allocated back to the responsible party. Lastly, the tort system can act as an incentive for drivers to act responsibly in order to avoid lawsuits in the first place.

The tort liability system is based on fault

It's the most common method for seeking compensation. With the tort system, the victim must prove that the other driver was at fault before he or she can collect damages.

Disadvantage of uninsured motorist

Like other methods, drivers may not be fully compensated unless they've purchased UM higher limits. The maximum paid for bodily injury is limited to the state's compulsory law requirement. Before victims can collect, they need to prove that the uninsured motorist is legally responsible for the accident, which can be difficult and expensive for the victim. Property damage is excluded in many states, and optional in others. Remember, UM only covers bodily injury. And, ultimately, drivers are paying for insurance to protect them against the failure of others to act responsibly.

High-risk driver programs usually have the following common characteristics:

Limited liability amounts to just comply with the state's financial responsibility or compulsory insurance laws; Limited medical payments coverage; Collision may be available only with a high deductible; and Premiums are substantially higher than premiums charged for average and above-average drivers.

Compulsory auto insurance

Most states have laws that require drivers to have auto liability insurance in order to register their cars and drive legally. As a substitute for insurance, you can post a bond, or deposit cash or securities to guarantee your financial responsibility, in the event of an accident. Many states require insurers to verify coverage and/or to notify the state if a policy is canceled or isn't renewed. Other states require insurers to submit information for policies they have issued.

Advantage of compulsory laws

One advantage of compulsory laws, compared to financial responsibility, is that drivers must provide proof of their financial responsibility before an accident occurs. Compulsory insurance works in combination with the tort system to ensure drivers are compensated for accidents that are the fault of the other driver.

Reinsurance facility

Pool arrangement, where insurers accept all applicants holding a valid driver's license. The insurers issue policies, collect premiums, and settle claims. If an applicant is considered a high-risk driver, the insurance company can assign the premiums and losses to the reinsurance facility, while continuing to service the policy. Like the other programs, all insurers in the state share underwriting losses and expenses of the facility. Of course, that is in proportion to the total auto insurance that they write for that state. There are also state funding mechanisms. Maryland has set this up to provide insurance for high-risk applicants. State funding mechanisms require all private insurers to subsidize losses, but companies can recover by surcharging their insureds.

Advantage of uninsured motorist

Provides some financial protection against uninsured drivers.

Disadvantage of financial responsibility laws:

Some potential disadvantages are that most financial responsibility requirements are effective only after an accident, a conviction, or a judgment. Injuries caused by an uninsured driver, hit-and-run accidents, or a driver of stolen car might not be compensated at all. As a final point, most financial responsibility laws set only minimum financial requirements, which may not be enough to fully compensate victims.

Joint Underwriting Associations

Subset of insurers who service high-risk applicants. The JUA sets the rates and approves the policy forms. A limited number of insurers are designated as servicing insurers to handle high-risk business. These servicing insurers receive applications from producers, issue policies, collect premiums, settle claims, and provide other necessary services. All auto insurers in the particular state pay a proportionate share of total underwriting losses and expenses based on each company's share of voluntary auto written. A portion of these funds is used to compensate the servicing insurers.

What are major disadvantages of tort liability

Substantial delays in reaching a settlement, either through negotiation or through the courts. Significant legal and administrative costs may also be involved with settling lawsuits. Lastly, some punitive damage awards given by juries are considered excessive.

Benefits of no-fault plans

The benefits required typically include the following: Medical expenses, Rehabilitation expenses, Loss of earnings, Expenses for essential services, Funeral expenses, and Survivors' loss benefits.

Advantage of underinsured motorist

The big advantage of UIM is that it provides additional limits of protection.

Disadvantage of underinsured motorist

The disadvantage is that even the underinsured coverage might not cover all of the victim's costs. Also, just like uninsured coverage, drivers are paying to protect themselves against the failure of others to act responsibly; in this case, for them to carry sufficient liability limits.

Advantage of financial responsibility laws:

The first advantage is that these laws provide some protection for you against irresponsible drivers. And, they work in combination with the tort system to ensure that an at-fault driver will not only be held liable for accidents, but also to pay for the financial consequences of those accidents.

Disadvantage of compulsory laws

These laws don't guarantee compensation, such as accidents caused by drivers whose insurance has lapsed or drivers of stolen vehicles. The required minimum amount of insurance may not meet the victim's needs. Compulsory laws may not reduce the number of uninsured drivers because some drivers might not insure their vehicles because insurance is too pricey. Others may let their coverage lapse after providing proof of insurance to register their vehicle. Insurers argue that these laws restrict their freedom to select profitable insureds. Also, they fear that state regulators might deny needed rate increases, resulting in underwriting losses. Consumer advocates argue that if insurance companies are allowed to increase rates to balance requirements for accepting all applicants, rates might grow unfairly high for good drivers. Lastly, compulsory insurance laws don't prevent or reduce the number of accidents.

No fault insurance

This covers accident victims on a first-party basis and allows them to collect from their own insurer, regardless of who was at fault for the accident. Certain no-fault laws restrict victims' rights to sue an at-fault driver. In some states, when a claim is beneath a certain threshold, victims simply collect for injuries from their own insurance policy. No-fault laws were developed to avoid the costly and time-consuming process of determining legal liability through the tort system.

choice no-fault

Under a choice no-fault plan, when drivers buy or renew their policy, they can choose whether to be covered on a modified basis. In most states with choice plans, if drivers don't choose modified no-fault coverage, they need to buy add-on no-fault coverage.