Insurance: For Me or Thee?

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Once upon a time, before we got married, my wife Tina got a ticket for driving without insurance and decided to contest it pro se. Her argument to the judge was simple: insurance was designed to protect the insured from potential losses to herself — not to protect a third party. Anyone she might harm had recourse to indemnification by demanding recompense either voluntarily or through civil action — the traditional recourse for most torts. She added, for good measure, that compulsory insurance laws were a racket — nothing more than rentseeking, insurance industry full-employment legislation.

At the time, Tina was very poor and couldn’t afford insurance. Burdened by a heavy student-loan debt and no job prospect, she was treading water running a one-woman cleaning business. Her $300 Chevy Nova was basic transportation. She had no other assets and was living in a $150-per-month apartment on the wrong side of town.

The judge — in a totally unnecessary flourish of engagement — cited these very reasons to show that mandatory insurance was necessary. Tina retorted that you can’t squeeze blood from a turnip; that, traditionally, once the perpetrator’s assets, however large or small these might have been, had been exhausted in compensation, that was all she wrote; that, in essence, mandatory insurance schemes forced the poor to cover wealthier people who could afford to insure themselves against damages perpetrated by those who could barely afford food and a roof.

Of course, she lost, but the judge admired her spunk and charged her only half the usual fine. While trying to settle up at the cashier's window, she argued her case to the cashier too. He asked her if she was black or Mexican or Indian and pregnant. She wasn’t, so she didn’t get off.

With the prospect of mandatory health insurance coming in 2014, will we get off? Where will the unfunded mandates stop?

Mandatory car insurance is premised on the assumption that driving is a privilege, not a right. Therefore, greater state control is justified. The counter-argument is that people have a right to travel; that driving a vehicle is the modern equivalent of using a horse, and that horse travel was never considered a privilege. It was a necessity.

Alongside the privilege argument (which actually came later) was the “assurance” argument, the argument that there is “no way of assuring that even though fault was assessed the victim of an automobile accident would be able to collect from the tortfeasor” (as Bill Long recounts in Automobile Insurance: A Brief History).

This argument prompts the question: since there is no assurance that a victim may be able to collect damages from a pedestrian, bicycle, equestrian, horse and buggy; or any other type of accident — including accidents on property normally covered by homeowner’s, renter’s, or liability insurance — will we one day be forced to buy these also? I can just imagine governments requiring panhandlers and the homeless to carry liability insurance to make it easier for citizens to collect damages from unfortunate encounters with them.

The “assurance” argument is better described as a “convenience” argument: an argument about providing a convenience for insurance companies and the better-off, at the expense of the poor. (The uninsured better-off face serious loss, if not destitution, when at fault.)

With the invention of the automobile in the late 19th century came the inevitable side effect of automobile accidents.These were perceived — rightly or wrongly (and probably as a natural response to a new and untested technology) — as more frequent and more harmful than previous, more familiar torts. Therefore, it was thought, new laws were required to govern automobiles.

Connecticut led the way in 1925 with a modest “financial responsibility” law. This required any vehicle owner involved in an accident with damages over $100 to prove "financial responsibility to satisfy any claim for damages, by reason of personal injury, to, or death of, any person, of at least $10,000."This early financial responsibility requirement applied to vehicle owners only after their first accident. In the same year, Massachusetts passed the first compulsory insurance law as a prerequisite to vehicle registration.

Mandatory insurance schemes force the poor to cover wealthier people who could afford to insure themselves against damages perpetrated by those who could barely afford food and a roof.

By and large, traditional tort practices remained effective, since — for over 30 more years — no other state saw a need to enact special automobile accident legislation. Then, in 1956, New York passed its compulsory insurance law, with North Carolina following suit the next year. Today, every state bar New Hampshire has some sort of compulsory insurance scheme, and even it has a “personal responsibility” requirement.

Minimum insurance coverage requirements vary wildly from state to state, since estimating the cost of an accident before it occurs is very difficult.The requirements are often expressed in tripartite form — as, for example, in Alaska’s and Maine’s laws, with the highest requirement at 50/100/25, or in the District of Columbia’s, at 10/25/5. These numbers are shorthand for thousands of dollars and refer, in sequence, to: "bodily injury per person/bodily injury per accident/property damage."

After an accident, and once these limits have been reached — again, that’s all she wrote. Limits on insurance coverage have no relationship to liability limits, which are determined only by a judgment and restricted only by one’s net worth.

How effective is the mandatory auto insurance system? An Insurance Research Council study estimated that about 15% of the US population is uninsured — in Colorado, almost 23%.

Many of the logical shortcomings in the mandatory car insurance laws must be evident to people generally, because there is no political will to enforce them effectively. In most states, it's pretty easy to avert the mandates. Most people who fail to comply with the laws do so because they cannot afford the additional cost. It doesn't seem that the will exists to remove these people's means of transportation, and often their means of earning a living. (California and New Jersey, however, have taken a perverse approach toward incentivizing compliance: if uninsured drivers are victims in an accident, they are — by law — prevented from recovering non-compensatory damages, such as damages for “pain and suffering” from the perpetrator.)

Instead of being fined or having their vehicles taken away, motorists are ordinarily given a ticket, and the fee is waived when they show up in court with proof of insurance. Naturally, they can then cancel the coverage or cease making payments once the court date has passed. All this does is create a hassle for the uninsured who happen to get caught, and increases the paperwork for the insurance companies — a small price to pay, I assume — that minister to the captive market.

Do states that have more uninsured drivers actually have lower fatality rates or lower accident rates, because uninsured drivers will presumably drive more cautiously? This is a milder form of economist Walter Williams’ thought experiment, in which he mused that traffic accident rates would decline dramatically if every car’s steering wheel were equipped with a razor-sharp rapier extending from the center of the wheel to within a few inches of the driver’s sternum.

Many of the logical shortcomings in the mandatory car insurance laws must be evident to people generally, because there is no political will to enforce them effectively.

Would the costs to the auto liability system be lowered if we had no mandatory coverage? Perhaps. The narrowing of the base might work against the lowering, but the reduction in regulation would certainly promote it. On the other hand, rates might increase with a broader use of uninsured and underinsured coverage — a pittance to pay for greater freedom of choice and much more convenience.

Soon after the enactment of the first mandatory car insurance laws, the imposition of compulsory social insurance (or retirement insurance) in the form of Social Security became a reality. Lately, after some of the floods, hurricanes, and tornados that have devastated various regions of the country, precipitating massive federal and state relief programs, mandatory flood insurance has been proposed.

Today we are faced with the prospect of compulsory health insurance, beginning in 2014 — if the Supreme Court upholds the constitutionality of Obamacare, a program being challenged by several states because of its compulsory nature.

One major provision of the new Health Care Act requires employers above a certain size to buy health insurance for their employees — definitely a third party mandate. The irony of this requirement is that the practice of employer-provided health insurance began during World War II as a way for businesses to get around government imposed wage and price controls. Since employers couldn’t offer salary hikes, they began to offer perks which, by some loophole in the wage and price control legislation, were not considered pay raises. Yesterday’s dodge becomes today’s mandate.

Advocates of compulsory health insurance argue that it is in the best interest of every individual. It broadens the base of insured people, thereby lowering premiums. But this argument hides the underlying logic of compulsory health insurance: whether or not it actually benefits individuals, it benefits third parties — insurance companies, paying patients (mostly insured), hospitals, and taxpayers, all of whom, to one degree or another, now pick up the tab for deadbeat patients (mostly uninsured).

Only a small minority of uninsured patients are destitute. For the rest, being uninsured is a lifestyle choice made possible by the widespread requirement that hospitals treat the seriously ill regardless of their ability to pay. The repeal of such laws would provide the strongest incentive for everyone to choose to buy insurance, while the truly destitute would rely either on charity or on Medicaid.

Insurance was invented to protect people from unforeseen losses to themselves, not to protect third parties. Transferring the definition of insurance into the realm of bonding muddles the distinction. Some states, such as Arizona, recognize this and offer a bonding option — based on the premise that driving a car is a privilege, and on the state constitution’s prohibition against forcing an individual into any sort of a private contract. But it’s a messy compromise, with folks overwhelmingly choosing insurance instead of bonding.

And when it comes right down to it, isn’t it reprehensible for a majority that is mostly well-to-do to force a less well-off minority to buy insurance merely for the majority’s convenience?




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Comments

Russell Hasan

This was a brilliantly written essay, but I am not convinced that there is a strong analogy between third party car insurance mandates and the Obamacare health insurance mandate. The difference is that with health insurance if someone gets sick and chooses not to buy insurance they have only themselves to blame, whereas if driver A crashes into driver B and A is too poor to pay the torts damages and A has chosen to be uninsured then it is B, not A, who suffers, through no fault of B's and where B has made no choice for which he should be made to suffer. There is an injustice argument if B must suffer because of A's bad choices. I have no strong opinion either for or against car insurance mandates, and I will concede that it probably unfairly burdens the poor, but I think Obamacare is far more evil because Obamacare attacks the foundational principles of personal autonomy and economic self-responsibility.

Bob Straub

Re: analogy between medical health coverage and auto insurance: What about the minor dependents of a person who chooses not to buy health care coverage? Don't they suffer through no fault of their own?

I am generally opposed to government mandates. But if I owned a road, I think I would require my customers to have liability insurance. Since governments own the roads (mostly) in this non-ideal society, it seems reasonable that they might require insurance, too.

There is a (another?) way that health care coverage differs from auto insurance. Real insurance is when a large group people who are at risk from rare and unpredictable events pool their resources, paying relatively small and regular premiums so that their losses when such an event occurs are recoverable. Health care coverage, as practiced today, "protects" large numbers of people from many commonplace and predictable events and conditions, such as periodic check-ups, birth control, drugs to prevent or treat chronic, predictable conditions, etc. It is not on as economically sound financial basis as is auto insurance.

Dale F. Ogden

Compulsory Automobile Insurance is designed for the benefit of and convenience of plaintiff lawyers. That way, whenever there is an accident, even if the at-fault person has no assets, they can collect from someone and keep a third or more of the settlement.

Visitor

Did TIna lose her driver's license? And if not, did she continue to drive without insurance, or drive without up to date plates?

Yep, "I fought the law, and the law won"nah, nah....Why waste the effort.

Robert Miller

Nope. She capitulated completely and bought insurance.

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