Fill 'Er Up with No-Fault, Please

By ANDREW TOBIAS Andrew Tobias wrote the 1982 best seller The Invisible Bankers: Everything the Insurance Industry Never Wanted You to Know.

There's a way to fix the auto-insurance mess. And in many states it's now such a mess, and people are so upset, it could conceivably lead to an entirely new system, one designed to serve the public rather than the attorneys and insurance agents. You could hardly design an auto-insurance system worse than ours. With minor variations, it works the same in every state, and it favors only three groups:

-- Trial attorneys (no state has true no-fault auto insurance).

-- Insurance agents (many states actually have laws forbidding group auto policies).

-- That small subset of accident victims lucky enough to be injured by millionaires, when it can be proved that the millionaire was the one at fault.

Under the current system, about 40 cents of every auto-insurance dollar goes toward selling policies or administering claims, not for fixing cars or compensating the injured. Nearly all that wasted money could be saved. Virtually every disinterested party who looks at the system -- from the young law student Richard Nixon in 1936 to the considerably less conservative Senator Daniel Patrick Moynihan of New York decades later -- concludes the same thing: the system stinks. It could be radically improved.

A sensible, efficient program would save billions of dollars in two ways. It would, first, all but eliminate sales costs and, second, all but eliminate legal fees.

Why sell insurance one policy at a time when we require everyone, by law, to have it? Imagine the added cost if we had to sell Social Security insurance one policy at a time. Or if we outlawed the sale of group health insurance. Or if we required everyone to contribute to the defense budget -- as in effect we do -- and then created a special sales force to sign everybody up.

More than 15 cents of each auto-insurance dollar is spent signing people up. (And lots of people don't sign up, pushing onto the rest of us the cost of any damage they do.)

Everyone should be covered automatically. Auto-insurance "premiums" should be added to the cost of gasoline. It would come to about 50 cents per gal., but there would be no other auto-insurance premiums to pay. You would be fully covered, after a $500 deductible. Collecting the premiums automatically this way would save a fortune in selling and administrative costs. And it would end the problem of people driving uninsured.

If we want to penalize young drivers for being accident prone (But why? They'll get older -- it all evens out), we can do that automatically too. Just include a surcharge on their driver's-license fees. Penalize city dwellers for their higher rate of claims? Sure, but do it automatically, by basing the amount of the deductible on the place the accident occurs: higher in cities, lower in the country. (This would also foil urban drivers who cheat by registering their cars in the boondocks.)

Gas guzzlers would pay more than others for insurance, which would encourage the purchase of efficient cars. But if that's deemed unfair to big-car drivers, evenhandedness could be restored through a small adjustment in the automobile-registration fee.

There are automatic or computerized solutions to all the rate-setting questions. For example, since the flat-rate premium might tend to subsidize the Rolls-Royce set, the deductible could be set at $500 or 5% of the Blue Book value of the car, whichever is more (about $6,000 more in the case of a Rolls).

All this would be lunacy if the idea were to let the state government take over the insurance business. But that's not the idea at all. The state government would do just three things. It would collect that extra gasoline tax (efficiently, along with the gas tax it already collects). It would divide the state's licensed drivers into groups of 500 or 1,000 (efficiently, by computer). And it would invite all the auto insurers to bid for those blocks of business, much as private insurers now compete for group health-insurance contracts. The bidding rules would be designed to prevent abrupt changes in market share from year to year, but by and large the privilege of insuring blocks of drivers would go to the insurers who offered to do it at the lowest cost.

Upon getting their licenses, drivers would find the name and phone number of the insurance company that had won their business printed right on it -- efficiently, by the computer. If that company mishandled a claim, drivers would do just what they do now: complain. But the complaint would have more impact, since the state could restrict or suspend companies with abnormal complaint ratios from bidding on future business. In cases of bad faith or negligence on the part of insurers, abused customers could sue, just as they do now.

But there would be a lot less suing going on, because we would stop spending billions of dollars and clogging the courts to decide who was at fault. Instead, we'd spend those billions to give accident victims the compensation they deserve.

If an accident is caused by criminal negligence, most notably drunken driving, then the full weight of the law should be brought to bear. And perhaps those laws should include larger fines, tailored to the resources of the offender.

But the main thing is to rush the accident victims to the hospital (chased by rehabilitation specialists, not lawyers) and pay all their medical costs and lost wages. We don't do that now for most serious accident victims, but we could afford it with a true no-fault system.

I say "true no-fault" because in all the states that now have purported no-fault, victims are free to sue for damages if their injury meets some, usually minimal, test of severity. So it's no-fault in name only.

Here is how true no-fault would compensate for pain and suffering (on top of medical expenses and lost wages). First, there would be a set schedule of payments based on the severity of the injury. It might peak at just $100,000 or $250,000, depending on how generous the voters felt (the cost would be covered by the gasoline surcharge). But at least it would be swift and sure and undiluted by legal fees. Second -- and this is important -- anyone who wanted to buy extra insurance against pain and suffering would be free to do so. Private insurers would doubtless be thrilled to sell it (and to write policies covering the $500 collision deductible as well). Like flight insurance, such a policy might not be a great buy. But it would be readily available for those who wanted it.

Almost all the consumer advocates and many insurance companies that have looked at this issue agree that true no-fault is the way to go. One who does not, so far, is Ralph Nader. Given his unique position, this is unfortunate. He recoils from any restriction on the Little Guy's access to the courts, because he sees it as the consumer's only practical defense against the Big Guys. And he's right: the specter of lawsuits is indeed a disincentive to corporate wrongdoing. But drivers already have plenty of incentive not to get into accidents. True no-fault wouldn't make the reckless any more reckless. And charging for it at the pump would at least get them to pay a share of the cost instead of driving uninsured.

"The courts are overwhelmed, swamped, inundated, choked," Senator Moynihan wrote years ago. "In a futile quest to carry out a mundane mission -- deciding who hit whom on the highway when every day there will be thousands and thousands of such events -- we are sacrificing the most precious of our institutions: the independent judiciary."

In the long run we cannot prosper in the world economy by busily selling each other auto insurance and suing each other over claims. We have to make something.

Pay-at-the-pump no-fault would be good for almost all drivers (except those who now drive uninsured and pay nothing) and good for those insurance companies that are efficient (they'd win even more business than they have now).

But we may never get a system like this, because selling the idea takes more than a sound bite. In ten seconds, backed by tens of millions of dollars in advertising, the trial lawyers will demolish it: "If you're horribly mangled," they will ask, "don't you want the right to sue the drunk who wrecked your life?" In ten seconds the insurance agents will demolish it: "Don't you think, in America, you should have the right to choose your insurance company?" These will be cheap, cynical shots designed specifically to keep the extra 40 cents or so of each insurance dollar that goes to them instead of us. But cheap, cynical shots play well on TV.