The Fatal Effects of No-Fault Auto Insurance

The idea that no-fault insurance increases fatal auto accidents seems preposterous. But a number of studies in the U.S. and elsewhere over the past decade have reached that conclusion. Now new research corroborates these findings by accounting for and ruling out other possible explanations for no-fault’s lethal aftermath.

A number of states have adopted no-fault coverage in various forms as a way to cut auto insurance costs. As its name implies, no-fault eliminates injury liability claims and lawsuits in relatively minor auto accidents by requiring that each injured driver’s own insurance company pay for his or her medical costs and missed paychecks, usually up to specified dollar amounts, regardless of who was at fault.

About half the states have some form of no-fault. Typically, such policies limit compensation for pain, suffering, emotional distress, inconvenience or lost financial opportunities for relatively minor accidents, restricting the right to sue to more serious injuries. No-fault has an advantage over the tort (traditional liability) system because it comes much closer to compensating auto accident victims for 100% of their economic losses (medical bills and lost wages). No-fault also tends to pay claims more promptly than the tort system because the victim collects from his or her own insurer rather than having to sue the other driver.

In addition, no-fault helps curb insurance fraud, which is usually motivated by the possibility of collecting pain and suffering damage for non-existent or exaggerated medical problems such as "whiplash." No-fault does not apply to vehicle damages, which continue to be paid under the liability insurance of the person at fault or by the insured’s own collision insurance.

The principal criticism of no-fault is that it may weaken the deterrent for careful driving provided by the liability system because it restricts the ability of drivers to sue for relatively minor injuries.

Previous research on the impact of no-fault on fatal accidents led to conflicting results. Some studies show an increase in highway fatalities following states’ enactment of no-fault laws, while others show no discernable effect. This research had potential shortcomings, however, in that it did not fully account for possible factors outside of no-fault that may have contributed to fatal accident rates.

The new study — entitled "The Incentive Effects of No Fault Auto Insurance," by Wharton professor J. David Cummins, Temple University professor Mary A. Weiss and Georgia State University professor Richard D. Phillips – isolates and controls for such potentially biasing factors for each state. These factors include:

    • The degree of speeding, in terms not only of the average highway speed of drivers in the state but also of the percentage of drivers who exceed average speeds
    • Per-capita alcohol consumption
    • The proportion of drivers under age 25
    • The amount of highway travel on the relatively more dangerous rural interstates
    • The availability of emergency medical services
    • The average education levels of drivers in accidents
    • The presence of experience rating (where drivers’ insurance premiums are affected by moving violations).

As Cummins, Weiss and Phillips confirmed, there were often significant differences between no-fault and tort states in many of these factors. For instance, the injury rates for the period 1982 to 1994 was 1,053 per 10 million vehicle miles in no-fault states vs. about 859 in tort states, while, on the other hand, the fatal accident rate was 18.6 for no-fault vs. 21.9 for tort. Contributing to the higher fatalities in tort states were a number of factors, including the fact that on average, tort states had higher levels of speeding and alcohol consumption, more miles driven on relatively dangerous rural road, and lower levels of emergency medical services.

Where the Cummins-Weiss-Phillips study differs from prior research is that it accounts for the possibility that states tend to adopt no-fault in response to relatively high accident rates. Thus, by their very nature, no-fault states would not be strictly comparable to tort states. But by using careful statistical analysis and considering factors such as those listed above, the study could isolate any contribution no-fault itself made to fatalities.

The authors pooled a cross section of accident data from the Federal Highway Administration from all 50 states from 1982 to 1994, as measured in fatalities per 10 million vehicle miles. They also factored in state demographic information from a variety of other sources, including the Insurance Research Council (IRC), the Bureau of Labor Statistics, and the Insurance Information Institute. They first examined no-fault vs. tort insurance states, then zeroed in on the different thresholds that no-fault states applied to allow injured parties to sue for accidents exceeding a specified level of severity, such as monetary costs or degree of injury.

The IRC data, based on claims settled in 1977, 1987, 1992 and 1997, showed that 70% of auto accident victims in no-fault states were ineligible for any tort claims. This proportion varied from a high of 79% in Hawaii down to 48% in Massachusetts. Such high proportions of ineligible damages raised the possibility that no-fault could reduce incentives for careful driving.

The researchers’ analysis confirmed that suspicion. Based on their model, they concluded that auto accident fatality rates are between 5.5% and 9.9% higher under no-fault that they would be under tort.

The impact of no-fault on road fatalities should be a wake-up call for insurance companies and state legislatures considering the adoption of no-fault laws. Whatever the advantages of no-fault in reducing accident expenses, its adverse effects on driver behavior carry a cost that cannot be measured in dollars.

The authors conclude, however, that there may be a way to make the no-fault system work without scrapping it entirely: Improve experience rating to make sure all states heavily penalize drivers with poor driving records, through higher insurance premiums. Increasing automotive costs to bad drivers would force many to either improve their driving habits or get off the road.

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