Home|About Us|Case Results|Referring Attorneys|Practice Areas|Contact

Lagging Liability Limits

By Jeana Bisnar

Nobody can drive without auto insurance. Well...nobody is supposed to drive without auto insurance. Governments have mandated for almost a century that drivers must be capable of providing compensation for most damages they may cause while operating a motor vehicle. I think it makes sense. People should be responsible for their actions. This concept of personal responsibility permeates our laws governing how we interact with one another.

However, I feel that the California insurance minimums in place now fails to successfully enforce this ideal. While the costs of medical care, vehicle repair and replacement have drastically increased, the required insurance coverage has remained at the 1967 levels. How can drivers with minimum coverage at 1967 levels possibly be held accountable for potentially sizeable damages? Are the financial risks of driving a motor vehicle being accounted for? Whose interests are being met? And, perhaps most importantly, what should the law be governing financial responsibility and what are the implications for the individual and for society? There are lots of issues to think about, and society's stake in each is high.

So how big is this disconnect? Embedded in California law is the assumption of financial responsibility for drivers of motor vehicles. In fact, the California Vehicle Code provides for 4 ways to establish financial responsibility, the most popular and feasible of which is a minimum amount of liability insurance coverage. Currently, in order to meet the requirements one must carry an insurance policy for at least $15,000 of bodily injury coverage per person, with a maximum of $30,000 for a single accident, as well as $5,000 of coverage for potential property damage.

These are the levels of liability established by the first insurance coverage minimum law enacted in 1967, back when Lyndon Johnson was president and a US stamp cost 5 cents. A lot has changed since then. The cost of a new car has more than tripled. Repair costs for automobiles have increased ten-fold and healthcare costs have grown exponentially. From these facts alone it is clear that the circumstances surrounding auto insurance claims have changed drastically since these laws were established. However, the same law governs how much coverage is sufficient to drive today.

It seems strange that this hasn't evolved over the last 40 years. Surprisingly little support has been voiced for keeping coverage aligned with average damages caused by motor vehicle accidents. Various resolutions have been passed by the Conference of Delegates of California Bar Associations in support of increasing minimums, but there is precious little public dialogue taking place.

In June of 2003, the Santa Clara County Bar Association sponsored one such resolution supporting an increase of the current levels of required insurance to $30,000 per person for bodily injury, with $60,000 per accident, and $10,000 in property damage coverage, to be implemented over several years incrementally. A similar resolution, with the Bar Association of San Francisco County as proponent, goes so far as to suggest increases to $50,000 per person and $100,000 per accident, as well as $20,000 in property damage. However, the attempt at actually amending the Vehicle Code, by Bill 456 introduced in the 2003-2004 session of the California Assembly, died in the hands of the Insurance Committee later that year. In accordance with Article 4 Sec. 10(c) of the California Constitution, because the bill was not passed prior to Jan 31 of the following year, it was labeled inactive and neither house can act upon it.

It is unclear what this lack of activity for or against this change means about the interests involved. There have been few attempts to update the coverage minimums over the past 40 years as medical care and auto repair rates skyrocketed. Does this mean that entrenched interests have successfully squashed any potential threats to the stability of the status quo? Or does this mean that no one has anything significant to gain from changing the requirements?

The associations in favor of updating the minimums claim to base their analysis on the much publicized exponentially increased costs of healthcare and auto purchase and repair. The argument goes back to the original justification for the original coverage requirements. Because the 1967 establishment of coverage minimums cites actual costs of damages as the basis from which requirements are to be drawn, it is only logical to update those minimums as costs change. Neglecting to do so is to introduce deficits into the financial responsibility model; if the required coverage cannot come close to covering costs, then the requirement should not be sufficient to establish financial responsibility required by the California Vehicle Code!

Opponents to the changes and the related resolutions focus mainly on the implications of enforcing new requirements. There are two main arguments; one accounting for changes in premiums, and a second that addresses potential effects on uninsured motorist activity. A common claim is that the benefits of higher coverage are outweighed by the expected increases in premiums. If every driver is required to purchase more insurance, they are also being required to pay higher monthly payments to their insurance provider mitigating any savings they might see. Proponents do not argue with this supposition. However, they do contend that with more coverage, there will be a smaller deficit between damages incurred every year and those covered by insurance policies, the remainder of which is paid by the injured party. If coverage could account for a greater proportion of actual damages, drivers would suffer less risk of incurring the costs of damages exceeding policy coverage, and damages would be paid from the policies of those who are financially responsible.

The second argument in opposition to increasing coverage requirements emphasizes the likelihood that instead of paying higher premiums, many drivers will instead drive without insurance. This may indeed be a major concern. There are always people who can barely afford insurance, and even a small increase in monthly payments will push some people who are currently covered to discontinue their policies. This increase in uninsured motorist activity will increase the number of accidents for which at least one party has insufficient insurance coverage, if any at all. Any given incident might be potentially more dangerous in terms of financial damages incurred by all parties involved. This issue is unique in that it is purely practical, and it shouldn't affect the average liability claim, nor the amount covered by insurance policies at the new requirement level. The potential for increased costs incurred at the hands of uninsured motorist is separate from the ideal of financial responsibility implemented through the insurance minimum requirement. However, this reality must be taken into account, because the inability to perfectly enforce the liability minimum allows risk to be disproportionately distributed to those who have more insurance.

Diversifying risk across the population of insured drivers is a circumstance that continues partially because it is in the interest of insurance companies to permit it, a situation somewhat unique to the insurance industry. Auto insurance coverage is one of few consumer products required to be purchased but offered exclusively by for-profit companies. And, in the case of insurance, the consumer is attempting to decrease her risk of financial liability, while the company is trying to do the same by insuring those least likely to make claims and spreading the remainder of the risk over a large population. However, those who are deemed more likely to cause accidents are charged higher premiums. This sounds familiar; people are responsible for supporting their personal estimated liability. But, imperfect enforcement highlights an important caveat. Many people cannot afford insurance, especially at the higher premiums associated with the proposed coverage levels. What this reflects is that driving possesses an inherent baseline of risk, no matter who is driving, and the required proof of financial responsibility for that baseline of risk exceeds the means of many Californians.

Many would say that financial responsibility means that if one cannot afford to be financially responsible for potential damages, one should not engage in activities where there is risk of damages. In other words, if you don't want to do the time (or can't pay the fine), don't do the crime. There are a few potential responses to this line of thinking. Because uninsured motorist activity is certain to occur and (according to some) is sufficiently large to negate benefits of increasing minimum liability, some believe the limits should not be raised. It may be a purely practical consideration that flies in the face of the ideal of financial responsibility, but it is too significant to ignore based on principle alone. However the role of financial responsibility is important in rooting California law beyond just the vehicle code. For individuals living together in interdependent communities, it is vitally important that all are held accountable for the risk and damage that they individually incur upon others. This is how appropriate caution and risk-aversion is achieved. Something should be done to preserve accountability, but the issues are complicated. The current liability limits do not do enough, but the practical implications of increased coverage requirements must be addressed.

But how dramatic would the increases need to be? According to the US Bureau of Labor Statistics, medical care costs in 2007 are 6.9 times what they were in 1967. Transportation costs, which include repair and insurance, are approximately 5.4 times what they in 1967. Taken together, these factors work out to be about the same as the aggregate consumer price index over that period. In other words, they haven't undergone an unusually large increase when compared to other expenses.

Over the same time period, the average bodily injury claim has increased from $1,432 to $11,271, and the average property damage claim has increased from $241 to $2,690. The fact that these figures have increased beyond the index for their categories further supports the conclusion that the changes in medical care and repair costs are not insignificant, and that accidents these days are more dangerous than ever. In 1967, the $15,000 bodily injury coverage was 10.5 times the average claim amount. The $5,000 property damage coverage was 20.7 times the average claim. Applying the same ratios to the current average claim amounts, the proportional coverage should be $118,346 per person in bodily injury coverage, with a $236,691 maximum per accident, and $55,683 in property damage coverage.

Compared to the resolutions passed by the CDCBA and the California Assembly Bill mentioned above, this increase is huge! Even if the coverage amounts were only adjusted for inflation, they would still be 6.1 times what they were in 1967, which is still 3.5 times the amount proposed by California Assembly Bill 456. So why are these numbers so out of synch with the legislation that has been proposed?

It looks like these proposals must be taking other factors into account, such as negative public reception and cost to the poor. The idea of such a huge jump in cost to the insured does raise the question: could this limit increase really work when 13% of Californians are living below the poverty line (approx. $19,000/yr for a family of four) in cities that are much more reliant than they used to be on motor vehicle transportation? If the lowest income Californians cannot get to their places of employment, there will be other social costs, and they might not be small.

Still, the numbers show that the deficit to financial responsibility if the limits stay the same is huge. Is it consistent with the principles of California law to force higher income earners to bear the risk caused by underinsured motorists? What would be required and what would be feasible seem to be entirely irreconcilable! Various communities have tried to do one of two things in order to address these practical implications: make improvements to the existing framework or provide entirely new frameworks that adjust the role of and reliance on personal financial responsibility. Each of the proposals has relevant affects, and each has its own benefits for the audience it is trying to reach. However, not one of them balances the various needs of society sufficiently.

A few years ago, the Foundation for Taxpayers and Consumer Rights experienced a victory when the bill they sponsored in support of amendments to the California Insurance Code was passed by the Insurance Committee, Congress, and finally signed by the Governor. Proposition 103 included measures governing the conduct of insurance companies operating within the state in areas including cancellation policies, use of driving records, and the systems used to assign premiums. Many of the proposed changes were aimed at making insurance costs more aligned with the actual risk that they insured against. They did this by limiting the factors influencing rates to those which more directly affect the insured's potential for involvement in an accident including driving record, miles driven annually, and number years of driving experience (among other things). The proposition also provided a legal definition for a "good driver" and established a required discount for good drivers as defined. What these amendments serve to do is more accurately charge risk premiums to those who are most likely to cause accidents. This is entirely consistent with a policy of personal financial responsibility. However, it does not help to account for the gross discrepancy in risk allocation where it really matters, in the actual distribution of damages when an accident happens.

Insurance companies have introduced an entirely different approach to addressing the issues of coverage and assignment of risk. "No fault" is a system by which all parties are eligible for benefits, but no "fault" is assigned, and thus there is no option to sue for compensation. Under this framework, there are limits on both claims and maximum damages paid to victims of accidents. The idea is that by spreading the risk over a large population, charging all parties, and serving all parties with no regard to "fault" would allow for less risk for each individual while also lowering premiums paid. However, opponents of this rule argue that by capping damages and limiting claims, the no-fault system is essentially limiting consumer rights to open courts. Furthermore, a study conducted by the Foundation for Taxpayer and Consumer Rights found that implementation of this type of system resulted in both limited access to benefits and higher premiums in states where the system has been tested. They also take issue with studies in favor of no fault systems, pointing out that projections approximating lower premiums are faulty, unrealistic, and incomplete.

The appeal of the "no fault" system is obvious: everyone receives benefits. This concept has the potential to ease bureaucratic red tape since there is less controversy as to who is at fault or who is covered by the policy. However, this system has practical and theoretical holdups. Besides limiting rights and perhaps failing to deliver on its promise of lower premiums, the entire framework flies in the face of the personal financial responsibility model that underlies California law. For these reasons, Proposal 200, the "Pure No-Fault" Initiative which would have eliminated fault in all non-criminal accidents, was rejected by California voters in 1996.

Another program proposed by the Foundation for Taxpayer and Consumer Rights addresses the practical concern for those in the lowest tier of household incomes. Many people in California support their families on poverty-level incomes but require vehicle transportation to maintain their employment. In sprawling metro areas, the market for low-paying work has adapted to the increased levels of mobility, spreading out opportunities and making vehicle transportation more necessary for those competing in that labor pool. To respond to the difficult circumstances of this particular demographic, the California Low Cost Automobile Insurance Program allows certain qualified applicants to obtain liability insurance with lower levels of coverage that still establish financial responsibility sufficient to satisfy California law. This "Lifeline Policy" provides liability coverage of $10,000 per person, $20,000 per accident, and $3,000 in property damage, which is sufficient to cover 85% of accidents according to the Department of Insurance. No subsidy would be required for this program, so only the low-income policy holders will incur the financial costs of this program. In fact, estimates at decreases in uninsured motorist claims as a result of this program, and potential decreases in uninsured motorist and collision premiums to regular policy-holders, are estimated at $100-$200 million.

The same issues brought up by other proposed programs are relevant here. It is true that this program is not entirely aligned with the principle of personal responsibility. Some drivers would be adding similar risk but contributing less to mitigating damages. In addition, this accommodation would uphold the current conditions that make vehicle transportation so important for this demographic, thereby supporting the circumstances that make this program necessary. However, the program has been tailored to limit these drawbacks. Policies would be available only to low income earners who are "good drivers." A pilot California Low Cost Auto Insurance Program was administered as a result of SB 171 (1999) by the California Auto Insurance Assigned Risk Plan in the San Francisco and Los Angeles areas where the need for low-income transportation was most tied to the workings of that labor market. It is now being rolled-out to all California counties. The program thus addresses the practical implication of high insurance premiums on the welfare of the community through decreased mobility of an important demographic.

The role of personal responsibility in the actual happenings of the vehicle and insurance world is grossly trivialized, especially compared to its role in California vehicle and insurance law. Changes such as Prop 103 continue to fine tune the inner workings of the relationships between insurance providers and their insured, as well as their respective relationships with the state. However, the liability coverage minimums which act as the baseline for establishing financial responsibility for actions undertaken while driving remain the most influential factor in maintaining or furthering the role of personal accountability under the law.

It is important that all relevant interests are taken into account; California law should enforce personal financial responsibility while also mitigating negative consequences for social welfare. But this cannot mean allowing outdated and insufficient policies to continue well after conditions change such that they fail to enforce the principles for which they were initially established. The numbers are clear, and the current conditions are in no way sufficient. Often principles and policies will overlap and often they will conflict. This requires creative solutions to address interests as best is possible.

Current liability coverage limits not only fail to enforce personal financial responsibility but also uphold a system where risk and cost is dispersed disproportionately. And while increasing coverage minimums will increase uninsured motorist activity and potentially upset labor mobility, the Low Cost Auto Insurance Plan and better minimum coverage enforcement can mitigate these practical implications. The effects of raising liability requirements have positive and negative aspects, but with the information that we have, it is clear that coverage minimums are grossly outdated and lead to unjust burdens of risk in society. With minimums, premiums will go up, but this is only a reflection of increases in costs that have been veiled by deceptively low coverage minimums over the past 30 years. Society is suffering, and these higher premiums would facilitate a smoother and more gradual payment of the real costs drivers as a whole are already being hit with in the form of insufficient liability coverage. This is the cost of personal responsibility. The California Vehicle Code should promote appropriate assignment of that cost. Otherwise, why have a minimum coverage limit at all?

HOLDING WRONGDOERS ACCOUNTABLE FOR THE DAMAGES THEY CAUSE SINCE 1978

---

Bisnar | Chase 2006-2008 - Super Lawyers is a listing of outstanding lawyers from more than 60 practice areas who have attained a high degree of peer recognition and professional achievement. Bisnar | Chase has received this award for three consecutive years.

---