Protecting Consumers From Uninsured Motorists: An Alternative Financing Mechanism

Abstract

For over 65 years, state legislators have debated how consumers who have been injured by financially irresponsible motorists will be compensated. While uninsured motorists insurance has become the modal choice among several states, responsible motorists in most states must completely pay for this coverage themselves. Motorists who drive without liability insurance contribute virtually nothing to meeting the costs of accidents they cause. This paper proposes that premiums for basic limits of uninsured motorists coverage be collected by a small universal motor fuel surcharge. These state-collected premiums then would be distributed to insurers on the basis of the number of vehicles that they insure within the jurisdiction. It is proffered that this mechanism is both more equitable and significantly lower in cost for the average motorist than the various present mechanisms of financing uninsured motorists coverage. Recently, consumers in geographically dispersed sections of the country have found it increasingly difficult and more expensive to obtain automobile liability insurance. Some insurers have withdrawn from markets in Massachusetts and New Jersey alleging inadequate rates of return. With the 1988 California passage of Proposition 103, many insurers have limited new business. The inevitable outcome of higher premiums and reduced availability will be increasing numbers of uninsured motorists on the nation's highways. Industry sources have estimated that over 16 percent of registered motor vehicles already are uninsured; in some states the estimates are as high as 50 percent (Garcia 1989, 1990; Long and Gregg 1965; Melloan 1988; Synnott 1983). Concamitant with increasing numbers of uninsured motorists is the issue of how injured consumers will be compensated for damages imposed by financially irresponsible motorists. For over half a century, state legislatures have contended with this issue. In efforts to guarantee compensation to those injured in motor vehicle accidents, legislatures in several states have enacted five broad types of overlapping statutes, ranging from auto financial responsibility laws to no-fault auto insurance laws. The existence of multiple laws in most states suggests that an effective solution has yet to be found. The consumer decision of whether or not to purchase auto liability insurance has distinct public good aspects. There are clear externalities or spillovers associated with this decision (Keeton and Kwerel 1984). There have been longstanding attempts by state legislators to intervene. But to date, the Achilles heel in every attempt to contend with financially irresponsible motorists has been enforcement. Because enforcing financial responsibility statutes through denial of highway use has proven difficult, it is reasonable to expect that significant evasion exists (Synnott 1983). For instance, Virginia is one of many states, which as a condition of registration, asks the registrant whether the vehicle is insured for at least the state-mandated minimum liability limits as one means of satisfying its financial responsibility law. In 1988, 0.12 percent of those seeking registration volunteered that they had not purchased liability insurance. Yet in the same year, when 338,000 owners of Virginia registered vehicles were asked randomly by the Commonwealth to document their coverage, almost 20,000 (5.91 percent) could not do so (Virginia 1989). Thus, for every one acknowledged uninsured motorist, there were 50 unacknowledged free riders. While a number of researchers have investigated the costs imposed on society by uninsured motorists (Calabresi 1970; Keeton and Kwerel 1984; Vickery 1969), less research has been conducted on using public sector financing mechanisms to address motor vehicle insurance issues. Over the last 20 years, several authors have proposed that to varying degrees auto insurance could be purchased via a tax on motor fuel. …