Necessary, but Not a Necessary Evil: Reforming Mandatory Auto Insurance Laws by Miles N. Clark

I. Introduction

In March 2009, Housing and Urban Development Secretary Shaun Donovan testified before Congress about the growing danger of a unique low-income housing crisis.  He stated that suburban sprawl has decentralized both affordable housing and job opportunities, which has rendered low-income families particularly susceptible to energy cost spikes.  Today, low-income suburban families spend nearly one third of their income on transportation.[ii] As the price of private transportation continues to soar, the rate of gentrification of urban areas has increased.  This, in turn, leads to rises in rents and property taxes in urban areas, which forces low-income residents to migrate to low-cost areas.  And for the first time, the destination of the underclass is the former haven of the old establishment: the suburbs, which during the past twenty years have been overbuilt and are now drastically undervalued.[iii] However, low-income families are particularly ill-suited to suburban life.  Its low densities and “clustered” land use patterns make public transportation uneconomical,[iv] and compel transportation by automobile.[v] Faced with unprecedented demand for private transportation among indigent drivers, states should seek to decrease the derivative costs of car ownership by providing government-run automobile insurance schemes for minimum coverage.  As three Canadian provinces demonstrate, such schemes ensure lower and more equitable insurance premium costs.

II. Automobile Insurance Law in the United States

That indigents must bear suburban driving costs is an unfortunate consequence of the market response to the energy crisis.  However, driving also requires purchasing automobile insurance, which is a matter of state control.  Current insurance schemes are an artifact of suburban preference for upper- and middle-class consumption: insurers exploit a false market to raise rates, and exploit information asymmetries to package gains as losses.[vi] Such transaction costs presuppose a consumer’s voluntarily participation in the market.  But what of the involuntary participant?

American insurance schemes can be broadly classified as either “personal responsibility” or “No-Fault.”  “Personal responsibility” schemes are more widespread.  These schemes hold drivers liable for the harm they cause, but compensate them for harm incurred from others.  Determination of fault depends on general tort principles of negligence.[vii] Because such determination hinges on factual inquiry, “personal responsibility” schemes are litigation-friendly; because they are litigation-friendly, case outcomes are speculative; because they are speculative, the likelihood of recovery decreases; and because of this decrease, premiums are typically lower, and courts to allow far greater latitude for damage recovery.  However, this indeterminacy means that many drivers might go uncompensated.

By contrast, “No-Fault” schemes circumvent the tort system’s fact-finding process: drivers need not prove due care in order to obtain compensation.[viii] Thus, they offer theoretical promise to indigent drivers, protecting claims too small to attract legal assistance and ensuring that damage recoveries speedily reach those who need compensation most.  However, speedy recovery typically extends only to personal damages (including medical care and wage losses); property damage determinations remain subject to litigious vicissitudes.  Further, drivers typically relinquish both the right to access courts for injuries below certain damage thresholds, and to recover punitive damages.[ix] Finally, No-Fault is very expensive.  The ten states with the highest average insurance premiums are all No-Fault or modified No-Fault states.  Insurers claim these rates reflect increased administrative expenditures and payouts for fraudulent claims.[x] However, No-Fault’s streamlined recovery processes, along with its damage floors, normalize the insurer’s litigation costs and minimize the possibility of a punitive damage “lightning strike.”  Thus, insurers can better determine their financial bottom lines, and by extension lower their reinsurance costs.[xi]

III. Automobile Insurance Law in Canada

As they currently exist, the “choice” between these two schemes is unsavory.  But it need not be this way.  Three Canadian provinces demonstrate that government-run insurance programs deliver lower and more equitable premium costs.  In these provinces, the government itself sells mandatory minimum coverage, while allowing private insurers to compete to offer insurance incentives.[xii] One example of government-run programs is British Columbia’s system, the Insurance Corporation of British Columbia (ICBC).  ICBC policies do not take demographic information into account when setting policy premiums.  Instead, the ICBC bases each premium solely on (1) client claim history, (2) type of car, and (3) insured’s location.

By contrast, private Canadian companies take demographic information such as age, sex, and income into account when setting policies.[xiii] These additional criteria result in higher premiums for indigents.  In 2003, in all six private-only insurance provinces, a twenty-two year-old male with a clean driving record who drove an inexpensive car paid a higher premium than an older male driver with a bad driving record who drove a luxury car.  Broader disparities continue at the municipal and provincial levels: average premiums in “government” provinces are significantly lower than averages in “private” provinces, regardless of the size or density of the cities each province contains.[xiv]

Theoretically, competition should inhibit usurious rate increases.  However, free-market “safeguards” do not explain the gap between rates in “private” and “government” provinces.  A simple explanation is that private, for-profit entities exist for precisely that reason: to make a profit.  Government programs, on the other hand, are established in order to carry out a different set of priorities.  This simple conclusion overlooks many details, but the relationship between industry control and premium prices is clear: private No-Fault schemes cost more than private personal responsibility schemes, which cost more than government-run schemes of either type.

In order to explain why free-market principles have not resulted in lower costs for the consumer, private Canadian insurers appear to parrot excuses from their American counterparts: blaming premium rises on a succession of oversize tort recoveries.  Such blame-placing often appears consistent with provincial regulatory structure.  In Ontario, for example, an insurer seeking rate increase approval need not prove overall financial distress, but only that its business model is unprofitable as to a certain zip code, demographic profile, or type of damage payout.  This encourages experimentation with different modes of risk assessment, as losses attributable to one metric might conceivably be “covered” by a subsequent “blanket” rate increase.[xv]

IV. Conclusion

In other industries, government management might stifle innovation.  However, insurance is not about innovation, but collective risk-management.  Moreover, insurers operate in a “false” market wherever statutory mandate cushions demand.  By christening collective risk-management as the solution to the inherent danger posed by cars, state legislatures strip the consumer of one of his fundamental market powers: the ability to withdraw completely.

Forty-eight state legislatures should not abandon their commitment to collective risk-management and leave drivers in a libertarian limbo.  Instead, they should seek a more modest goal: to use gentrification’s demographic sea change to embrace modified free-market insurance approaches like that of the ICBC.  Such approaches combine the best elements of collectivism and free-market principles: granting the state a monopoly over the minimum coverage that it alone has the power to mandate, while allowing private competition for optional incentives.  This clean division between public and private interests will result in reasonable, predictable insurance rates for all drivers.

[i] Founding Editor, No Record Press.

[ii] See Livable Communities, Transit Oriented Development, and Incorporating Green Building Practices into Federal Housing and Transportation Policy: Hearing Before the Subcomm. on Transportation, Housing and Urban Development, and Related Agencies, H. Comm. on Appropriations, 110th Cong. (2008) (testimony of Sec. Shaun Donovan, U.S. Dep’t of Housing & Urban Dev.), available at; Transp. for Am., Transportation and Social Equity: Opportunity Follows Mobility 3 (undated), available at (transportation costs for low-income residents nationwide are more than thirty percent of income); Brookings Inst., Commuting to Opportunity: The Working Poor and Commuting in the United States 4 (2008) (households earning between $20,000 and $49,999 spend at or above thirty percent of disposable income on transportation costs).

[iii] See Terra McKinnish et al., Who Gentrifies Low-Income Neighborhoods?, 66 J. Urb. Econ. (forthcoming 2009) (citation omitted), available at  While McKinnish et al. take pains to show that gentrification can have benefits to minority groups, they concede that members of those groups who lack a high school education may exit gentrifying neighborhoods at a disproportionate rate.  “A black high school dropout [is] more likely than average to move into a non-gentrifying low-income neighborhood than a gentrifying low-income neighborhood.”  Id. at 20.

[iv] “Usage of alternative modes of transportation drastically increases for population densities over 10,000 people per square mile, while private vehicle utilization drops. . . .”  Catherine L. Ross & Anne E. Dunning, Land Use Transportation Interaction: An Examination of the 1995 NPTS Data 16 (1995) available at  In 2000, forty-two cities in the United States had population densities over 10,000. Notably, of the fifty largest cities in the United States, only seven had densities of 10,000 or more. Seven out of the ten largest cities in America fell under the threshold: Los Angeles (7876), Houston (3372), San Antonio (2708), Phoenix (2782), San Diego (3772), Dallas (3470), and Detroit (6855).  See U.S. Census: U.S. Municipalities over 50,000: Ranked by 2000 Population,, (last visited Oct. 17, 2009).  Of these seven cities, only two—Los Angeles and Detroit—had a population of over 1 million in 1950 (out of the twelve American cities with a population of over 1 million in 1950).  See id. However, insofar as these two urban “outliers” may have resembled “traditional” cities around 1950, they have subsequently undergone drastically different demographic shifts.  First, the urban core of Detroit dropped from over 1.8 million to little over 900,000 between 1950 and 2000.  See United States: Urbanized Areas and Core Cities: 1950 to 2000,, (last visited Jan. 12, 2010).  Second, between 1970 and 2000 Los Angeles’ population grew by forty-five 45 percent while its area grew by 300 percent.  See Andres Duany et al., Suburban Nation: The Rise of Sprawl and the Decline of the American Dream 12 n.1 (2000) (citation omitted).  While admitting that there is “substantial rural poverty,” one study points out that nearly twenty percent of the American urban population is poor, compared with less than eight percent of the rural population.  See Edward L. Glaeser et al., Why Do the Poor Live in Cities? The Role of Public Transportation, 63 J. Urb. Econ. 1, 1–2 (2008) (citations omitted).  For a description of the disparate cost and travel times between public and private transportation in urban areas, see id. at 12–16.

[v] See Duany, supra note iv, at 22–31.  Planners’ choice to eschew serious consideration of sidewalk design was aesthetic.  “The street wears us out.  It is altogether disgusting.  Why, then, does it still exist?”  Id. at 64 (quoting Le Corbusier, The City of Tomorrow and Its Planning 129 (1929).  The perils of life in the suburbs are now being felt by the victims of the current economic recession, who are forced to turn to public transportation after no longer being able to afford the cost of repairing their automobiles.  See Julie Bosman, Scattered in Suburbs, and in Need, N.Y. Times, Oct. 4, 2009, at MB1, available at

[vi] In 2003, a study of Canadian insurance schemes (also set at the province level) found that provinces which mandated carrying government-issued insurance were less expensive than those provinces that mandated insurance but left the market entirely in the hands of private companies. See Consumers’ Ass’n of Can., Review of Automobile Insurance Rates 5 (2003), available at  Poor investments by insurance companies lead to reduced assets, for which insurers compensate by raising premiums; the “administrative costs” of No-Fault insurance are largely illusory.  See Harvey Rosenfeld, Auto Insurance: Crisis and Reform, 29 U. Mem. L. Rev. 69, 75–81 (1998)

[vii] See Rosenfeld, supra note vi, at 73–83.  Personal responsibility insurance schemes have been adopted by thirty-six states.  See Found. for Taxpayer & Consumer Rights, The Cost of No-Fault Auto Insurance 1–4 (2005), available at  Such schemes have a long history.  See Richard M. Nixon, The Changing Rules of Liability in Automobile Accident Litigation, 3 Law & Contemp. Probs. 476, 476–80 n.6 (1936) (describing early common-law interpretations of how tort liability attached to drivers of automobiles).

[viii] See Rosenfeld, supra note vi, at 96–97.

[ix] See id.  Moreover, personal damage recoveries—in the form of medical expenses—are typically larger than property damages when both arise simultaneously in an accident setting, therefore limiting even further the possibility that an indigent driver will be able to access the court system.  See id. Nevertheless, courts typically uphold such schemes as constitutionally valid.  See, e.g., Del Rio v. Crake, 87 Haw. 297, 955 P.2d 90, 99–100 (1998) (upholding statutory restrictions on tort thresholds under No-Fault); Pinnick v. Cleary, 360 Mass. 1, 31–32, 271 N.E.2d 592, 611 (1971) (No-Fault insurance scheme does not violate federal due process or equal protection protections); State v. Cuypers, 559 N.W.2d 435, 437 (Minn. Ct. App. 1997) (mandating No-Fault insurance does not violate constitutional right to interstate or intrastate travel); Rybeck v. Rybeck, 141 N.J. Super. 481, 493, (1976) (No-Fault statute meant to adequately compensate traffic accident victims did not violate due process).

[x] See Rosenfeld, supra note vi, at 87–90; Premium Index—National Average,, (last visited Jan. 12, 2010).  A list of average premiums by state is also available from this site.  Moreover, between 1998 and 2002, premiums rose ninety-two percent faster in No-Fault states than in personal responsibility states.  See Found. for Taxpayer and Consumer Rights, supra note vii, at 1.

[xi] See Rosenfeld, supra note vi, at 87–90.

[xii] See R.S.O. 1990, ch.25; R.S.Q., ch.A-25; R.S.N.B., ch.1-12; R.S.P.E.I., ch.I-4; R.S.N.S., c.231; R.S.B.C., ch.231; R.S.A. ch.M-23; R.S.M., ch.140; S.S., ch.A-35.  See generally Consumers’ Ass’n of Can., Review of Automobile Insurance Rates (2003), available at (arguing that free-market competition will offer consumer choice and lower prices).

[xiii] See Insurance Corporation Enabling Act, R.S.B.C., ch.228; R.S.B.C., ch.231; R.S.B.C., ch.318; Consumers’ Ass’n of Can., supra note xii, at 11.

[xiv] See Consumers’ Ass’n of Can., supra note xii, at 12, 27; Statistics Canada, Population of Census Metropolitan Areas (2006 Census boundaries), available at

[xv] See Bernard Simon, Anger Over Car Insurance Rates in Canada, N.Y. Times, Aug. 14, 2003, at W1, available at  Pro-private insurance trade organizations emphasize the fact that all insurance schemes, public or private, operate within a strict regulatory framework.  See Insurance Bureau of Canada, Car Insurance where You Live, (last visited Jan. 13, 2010).  See generally Consumers’ Ass’n of Can., supra note xii (describing the processes by which insurance rates are increased).