|
June 28, 2002 (Atlanta) - Many states have adopted no fault automobile coverage as a way to control rising insurance costs and improve the efficiency and timeliness of compensation to drivers involved in accidents. But according to a recent study, the benefits of no fault coverage come at a price.
"Our study found that the state fatal automobile accident rates is 7-15% higher than they would have been if the state had remained with traditional liability coverage rather than adopt no fault insurance," said Richard D. Phillips, associate professor in risk management and insurance at Robinson College of Business and co-author of "The Incentive Effects of No Fault Automobile Insurance," recently published in The Journal of Law and Economics.
The study, based on data from 1968 to 1994, is co-authored by J. David Cummins, professor at The Wharton School and Mary A. Weiss, associate professor at Temple University. The data presents new evidence in a debate stemming from conflicting results from previous studies on the relationship between no fault insurance and accident fatalities.
The majority of no fault laws currently in place were adopted during the mid-1970's as a way to eliminate minor accidents from the courts. The traditional tort liability system was thought to encourage injured drivers to sue for damages they had not really incurred in the hopes the insurer would settle rather than fight a bogus claim. Proponents of no fault argue the only type of loss a driver incurs in a minor accident is loss due to medical expenses, lost income, and property damage -- all items that are easy to document and without much controversy. So why go to court? No fault laws restrict the ability of injured drivers in minor accidents to seek compensation from the courts and require insurers for each party involved in the accident to indemnify their own driver regardless of fault. Injured persons in more severe accidents, who are more likely to have incurred non-economic damages (pain-and-suffering) in addition to economic damages, regain their rights to sue and are able to seek compensation for both types of loss.
No fault laws have largely achieved their objectives. However, the unintended consequence of these liability restrictions is that states which adopt no fault laws may have reduced a potential penalty associated with reckless driving and therefore reduced the incentives drivers have to slow down and drive carefully.
Research conducted in 1982 found no fault coverage weakened the incentive for drivers to be careful on the road. The claim was that this led to higher accident rates. But studies later that year denounced those findings and found no relationship between no fault coverage and fatalities.
The authors of the current study argue the mixed results are not surprising because the empirical tests employed in prior research implicitly assume the group of states which adopted no fault laws did so either by random chance or the rationales used to argue for the tort restrictions were unrelated to the accident rates in the state. However, even a casual look at the group of states that adopted no fault laws suggests this is not true. For example, the majority of no fault states are in highly urban areas -- areas that have high accident rates but low fatality rates due to the slower speeds driven in more densely populated regions. Thus, directly comparing states that did or did not adopt no fault laws is inappropriate -- you're not comparing apples to apples. The current study employs a more robust empirical methodology that allows the researchers to better isolate the specific contribution no fault insurance has on fatalities.
"All is not bad news though," continues Phillips. "Our research also finds evidence that states can mitigate the negative effects of no fault insurance by adopting more responsive experience rating systems which allow insurers to adjust premiums to more closely reflect the driver behavior of the insured." The authors find evidence that states that provide greater access to information that can be used by insurers to adjust a driver's premium based upon prior experience have lower accident rates. Thus, the positive incentive effects greater experience rating can be used to offset the negative effects of the tort liability restrictions.
"This study demonstrates that the path to lower insurance premium via tort restrictions on minor accidents is not a panacea," said Phillips. "While there are advantages to no fault coverage as an accident compensation system, the tradeoff comes at a price. The good news is that states mitigate this cost by designing a system that still penalizes drivers for reckless driving -- just don't do it through the courts."
_________________________________________________________
The J. Mack Robinson College of Business is one of the nation's top business schools. The College's Flex (part-time) MBA program has been listed in the top ten by U.S. News for the past seven years. Business Week magazine ranked the College's Executive MBA program 20th in the world and Forbes rated Robinson in the top 20 for return on investment for regional schools. Success Magazine ranks the College's entrepreneurship program among the top 50 in the nation. Georgia State University's Robinson College of Business has an enrollment of more than 8000 students and is located in downtown Atlanta.
Media Contacts:
Tammy DeMel
Associate Director, Communications and External Affairs
Robinson College of Business
Phone: 404/413-7078
Cell: 404/702-9743 | 
