THE BUSINESS WITH 103 MILLION UNSATISFIED CUSTOMERS

THE grim statistics of highway travel in the world's most motorized society add up to an irresistible sales pitch for auto insurance. Cars have killed more Americans since 1900 than the death toll of all U.S. wars since 1775. Roughly 24 million cars crashed in 1966 alone, injuring 4,000,000 people, disabling 1,900,000 and killing 53,000.

The economic loss caused by this carnage is well over $12 billion a year, and there is no question that the U.S. desperately needs a highly effective auto-insurance system that would compensate traffic victims rapidly, fairly and at reasonable cost to policyholders. But there is no question, either, that the U.S. auto-insurance system is a model of expensive inefficiency. The country's 103 million drivers have every reason to complain.

In ten years, the average premium has soared 55%. Car owners who take out a standard 50/100/5 liability policy (on which the company will pay up to $50,000 to one injured person, a total of up to $100,000 to all persons injured in one accident, and up to $5,000 for property damage) are also likely to include comprehensive protection (fire, theft, etc.), plus a collision policy requiring them to pay the first $100 in repairs. In Los Angeles five years ago, that package cost $279 a year for a couple with an 18-year-old son, even though his high school driving course got them a 10% discount and he used their low-priced car for pleasure only. Today the cost is $342--up 23%. In Houston, the rate has risen 49%, to $284.40. Boston tops the U.S. with a yearly premium of $711--up 71%.

The price of auto insurance is so high that most people would like to find a way of passing it up. But even though New York, Massachusetts and North Carolina are the only states that make liability coverage compulsory, it is virtually unavoidable everywhere. An uninsured driver must buy it or post equivalent financial security as soon as he is involved in a serious accident or gets convicted of a serious driving offense. And whichever alternative he chooses, he is in trouble. With a damage claim hanging over his head, few if any insurers will accept him as a future risk. If he posts personal security, he may lose his home or savings.

Paint It Red

Insurance companies say they are losing their savings, too. Despite the steep rise in premiums, the industry colors itself a bright red. In ten years, physicians' fees have gone up 39% and hospital costs 92%. Weekly factory wages have risen 42%, boosting lost-income settlements. Typical repair bills have climbed more than 50%. As a result, the average bodily-injury claim is up 31%, the average property-damage claim 46%.

What such arithmetic means, say insurance men, is that from 1956 to 1966 the industry paid out $1.6 billion more in liability claims than it received in premiums. Critics answer that this "underwriting loss" actually stems from the unusual accounting used in seeking higher rates. For one thing, the companies put aside a large portion of their premiums as "unearned reserves," count them as a nontaxed liability--and then invest them along with other reserves. And when it comes to setting rates, critics add, the companies refuse to consider their investment profits. Still the industry's overall profits are less than 6%--just about the lowest of any major U.S. business. It is only by dipping into investment income that many auto insurers stay in the black.

Chief source of their trouble is the widely misunderstood liability coverage--which is quite unlike other forms of insurance. When a person buys fire, medical or collision insurance, his company pays him directly for his losses. But a liability policy does not protect a driver against the cost of injury to himself; it protects him against the possibility of having to pay for someone else's injuries in the event that a court finds him at fault. Once that happens, the driver's company must pay the judgment against him. And with its own money at stake, the company usually tries to beat down the victim's claims, however just. As damage awards mount, the industry compensates for its losses by raising everyone's premiums. But even when a company wins in court and does not have to pay a claim, it may still retaliate against its policyholder by canceling his insurance, a fate that makes other companies regard him as such a poor risk that he finds it very hard to buy a new policy.

Preferred Risks

Compounding this recipe for hostility between all parties is the difficulty of assessing the legal responsibility for auto accidents. In the six states* that have "comparative negligence" laws, a victim who is partly responsible for a crash can recover a proportionate percentage of his losses. In the other 44 states, unless the victim can prove that the policyholder was entirely at fault--and that he himself was utterly blameless--the company need not pay him a cent. Indeed, the worse the accident--a ten-car chain collision, for example--the more difficult it usually is to pin sole blame on one driver and reimburse anyone. If a driver has a heart attack and his car mounts a curb, hitting ten pedestrians, who is at fault? No one. Who gets paid? No one.

Almost inevitably, the fault system results in wildly erratic settlements. Insurance companies are notorious for overpaying small "nuisance" claims because it would cost more to fight them than to settle. At the same time, the seriously injured victim with high economic losses is often unable to wait for his case to come to trial and is forced to settle for whatever the company offers. If he does gamble on going to court, he may lose the case and get nothing. On the other hand, if he wins he may hit the jackpot.

So much money is involved that it seems to nourish corruption. There are adjusters who take bribes to settle cases, plaintiffs who file inflated claims, witnesses who remember the unrememberable, doctors who commit perjury, and lawyers who squander their talents working for contingent fees (30% of what they win for their clients), which now provide roughly one-third of the U.S. bar's total income.

So great is the cost of lawyers' fees and overhead that it takes an estimated $2.20 in premiums and taxes to get $1 to an accident victim. (Blue Cross delivers $1 in benefits for $1.07.) Nor is inefficiency the only drawback of the ponderous system. Although only 5% of auto cases ever reach trial, they still pre-empt about 65% of the nation's civil-court calendars. It now takes 2 1/2 years to get a civil case tried in most cities.

The fault system also forces insurers to compete almost entirely for "preferred risks"--drivers who seldom drive and people most likely to impress juries if they do get into trouble. As a result, thousands of unpreferred motorists have been unceremoniously stripped of their policies or forced to pay sky-high surcharges, not only because of accidents, but sometimes because they happen to live in "red line" (claim-prone) areas or belong to supposedly risky groups--a category that includes the young, the old, Negroes, actors, barbers, bartenders, sailors, soldiers and men with frivolous nicknames like "Shorty." Divorcees are often blackballed because they might irk women jurors; doctors and clergymen are frowned upon as "preoccupied" drivers. A Manhattan lawyer was banned after someone hit his car in his apartment-house parking lot while he was upstairs asleep; a California housewife with a perfect driving record lost her policy because her husband was a Navy medic--driving an ambulance in Viet Nam.

All states have "assigned-risk" plans, requiring every insurance company to accept a quota of castoffs, whom they sometimes charge 150% above standard rates for minimum coverage. For some accident-prone drivers, even that price may be a bargain, but insurance companies have been so fast and loose about canceling policies that many of those dumped into the assigned-risk pool do not deserve it. In 1964-65, for example, almost 70% of New York's assigned-risk drivers had clean driving records.

Painless Finance

Problems have proliferated so rapidly that soon only the Government may be able to handle the financial hazards of auto insurance. But how? In 1869, the Supreme Court ruled that "insurance is not commerce," thus exempting it from federal antitrust laws and congressional regulation of interstate commerce. In 1945, after the court had reversed itself, the McCarran-Ferguson Act put all insurance under state supervision. But many Congressmen now believe that the states are flunking the auto-insurance part of their job. A Senate subcommittee has called for a "root and branch" investigation of the entire industry. President Johnson echoed the request in his State of the Union message last week, and Senate hearings are due this spring. One likely result is that the McCarran-Ferguson Act may be amended to impose federal standards on lax state insurance commissions.

As if to ward off that result, more state commissions are holding public rate hearings, denying premium boosts and ordering insurers to specify their reasons for cancellations and nonrenewals. But none of this will lower the price of insurance. As cancellations decrease, the industry will find itself handling more high-risk drivers and paying out more in damages. To reduce their losses, they will be forced to raise premiums still higher.

Somehow the industry must be helped to cut its costs. One obvious step is tighter state driver-licensing--or even a federal license for all U.S. drivers. If 20% of the country's drivers lost their licenses, says the Stanford Research Institute, the accident rate would go down 80%.

Some critics urge the Federal Government to do the insurance industry a favor and take over the auto-accident business entirely. Urban Specialist Daniel P. Moynihan, who chairs a federal auto-safety advisory committee, suggests a federal insurance system modeled on workmen's compensation, with awards made strictly on the basis of loss rather than fault. "Financing such a system," he argues, "might be the easiest part of all." Some $3.4 billion a year in gasoline taxes is already being spent to build the Interstate Highway System. When the system is finished in 1973, Moynihan would simply raise the gas tax a penny or so a gallon and switch the revenue to insurance, for which motorists would pay no other premium.

There are serious objections to Moynihan's nonfault Government insurance scheme, however tidy it sounds. For one thing, it would be fought hard by the oil industry, which aches to repeal the present gas tax. For another, it might be so financially painless that U.S. drivers would tend to worry less about their liability for accidents. And Government insurance might become a political football as legislators vied to curb needed rate raises.

Most experts still feel that private enterprise, with all its built-in advantages of business competition, should be given a second chance rather than a death sentence. They argue that the way to cut auto-insurance costs is to design a system that automatically compensates most victims regardless of fault, and still gives them the option of going to court to ask for more. Such mixed systems are already operating in several other countries, notably in Canada's Saskatchewan Province, where auto insurance costs two-thirds as much as identical coverage in adjoining North Dakota.

A much discussed mixed system geared to the U.S. is now being advocated by Law Professors Robert E. Keeton of Harvard and Jeffrey O'Connell of the University of Illinois. In their book After Cars Crash, they propose a novel form of auto insurance called "Basic Protection," which would pay benefits more widely and efficiently, yet preserve both private enterprise and the right to file lawsuits for severe injury and economic loss.

Under B.P., all motorists would carry compulsory insurance that started paying victims immediately, regardless of who was at fault. The injured motorist, his passengers and any pedestrians he hit would be paid directly by his own insurance company--not the other fellow's--up to $10,000 per person and $100,000 per accident, mainly for medical expenses and wage losses up to $750 a month. Collateral benefits from Blue Cross and other sources, which juries are not permitted to consider when setting awards, would be deducted from B.P. payments; but such collateral coverage would entitle motorists to lower premiums. B.P. would also exclude property damage and payment for pain and suffering, which the authors consider a boondoggle in most cases. Even so, motorists could insure themselves and their families at extra cost against pain, inconvenience and "catastrophe" losses above $100,000.

Out of Business

If a victim's losses exceeded B.P. limits, he could still go to court and sue for damages above $10,000, plus pain and suffering if it amounted to more than $5,000. In turn, a B.P.-insured motorist would be personally liable for paying judgments exceeding those amounts.

Some experts claim that B.P. would cut insurance costs as much as 25%, while compensating 25% more victims. A few top companies favor parts of the plan; Insurance Company of North America has run newspaper ads supporting it. Pessimistic insurance men, however, foresee costlier, slower claim procedures, rising payments to now uncompensated victims--and no letup in accident suits because claims above B.P. would still attract swarms of contingent-fee lawyers. The American Trial Lawyers Association (the negligence bar) does net agree. It seems to fear that B.P. would put them out of business. In fact, after the scheme won the support of 250 Boston lawyers last summer and unexpectedly swept past the lower house of the Massachusetts legislature, a lobby of panicked negligence lawyers killed it in the state senate. The plan is pending or soon to be introduced in the legislatures of California, Connecticut, Illinois, Minnesota, New Jersey, Rhode Island and Wisconsin--in all of which negligence lawyers are fighting it.

Whatever the outcome, debate over the Keeton-O'Con-nell plan ought to spur auto insurers to self-reform. Some big companies have already moved toward nonfault by using an "advance payments" plan: if their policyholder is clearly liable, the victim is immediately paid for his out-of-pocket losses--without being asked to waive his right to any future settlement. The companies report that such claimants seldom sue later on. Other companies, notably State Farm Mutual and Allstate, have cut overhead by using computerized billing and their own low-commission salesmen rather than outside agents. Auto insurers might also save the public millions by selling group policies to companies and unions. Beyond that, they could swing their weight behind safer car design. If auto insurers offered big discounts for cars with easily repaired fenders or sturdy bumpers of uniform height, Detroit might soon find that it would pay to provide them.

The trouble is that many of these ideas are still just that --ideas. With bright exceptions, too many auto insurers refuse to believe that sweeping reform is needed, that exasperated motorists across the land are awakening to the suggestion that far better coverage is possible.

Two courses are open. One is Government auto insurance, which the industry dreads as a door-opener to further Government intervention in the insurance business. The other is fast industry action proving that private enterprise can best serve the motoring public. In every state legislature, the industry can and should unite to pit its great lobbying power against the negligence lawyers and in favor of a nonfault system--the Keeton-O'Connell plan, perhaps, or an even better one, if insurance experts can devise it.

* Arkansas, Maine, Mississippi, Nebraska, South Dakota, Wisconsin.

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