California's automobile insurance system is based on the concept of fault. Under this system, a person at fault for an automobile accident is required to pay for injuries or damages caused to someone else. Most people buy insurance to protect themselves financially in case they are at fault in an automobile accident.
In fact, state law requires all owners of motor vehicles (cars, trucks, and motorcycles) registered in California to be covered by a minimum level of insurance to assure that accident victims receive payments for losses from at-fault drivers. As Figure 1 shows, there are minimum coverage levels for bodily injury and property damage. A driver's bodily injury insurance makes payments to other persons for their economic losses, which include the costs of medical care (including rehabilitation) and lost job income, and for noneconomic losses--referred to as ``pain and suffering.'' A driver's property damage insurance makes payments to someone whose property is damaged. In practice, most people who obtain insurance choose to cover their vehicles at higher levels than the law requires. On the other hand, many others choose to operate their vehicles without any insurance (``uninsured motorists''), which is in violation of current law.
Regardless of whether an at-fault driver has insurance, persons injured in an accident can sue to receive full payment for their injuries and losses. Generally, these lawsuits result from disagreements over who was at fault and payments for injuries and losses.
No Fault Insurance. Instead of requiring coverage to pay for injuries caused to others, the measure requires drivers to cover their own and their passengers' injuries, regardless of who is at fault for the accident. The measure refers to this as Personal Injury Protection (PIP) insurance. A driver's PIP insurance also covers family members, as specified, who are injured while riding in other automobiles. It also covers drivers and their families involved in automobile accidents while walking or biking. All owners of motor vehicles operated or registered in California would be required to carry PIP insurance and would be required to provide proof of insurance annually to the Department of Motor Vehicles in order to register or reregister a vehicle.
Ability to Sue. In most cases, people would no longer be allowed to sue to recover damages for death or bodily injury from automobile accidents. The determination of fault would no longer be a factor for payment of expenses related to a person's automobile accident injuries. Instead, payments would come from a person's own insurance policy, not from suing someone else or collecting from someone else's insurance policy. A person could still sue for bodily injuries in certain cases, such as accidents involving drunk drivers or drivers committing a felony.
The measure also prohibits the owner of a motor vehicle not insured for property damage from suing to recover property damage to their vehicle.
The major provisions of this measure are discussed below:
PIP Insurance. The measure requires a minimum level of PIP insurance of $50,000 per person per accident. This covers benefit payments for medical care, rehabilitation, wage loss, replacement services (activities such as cooking or housekeeping that can no longer be performed due to injury), and death resulting from motor vehicle accidents. The $50,000 could be used for one type of benefit (such as medical care) or for a combination of benefits.
The measure requires insurance companies to offer other levels of PIP insurance, ranging from $250,000 to $5 million. The measure, however, defines $1 million in coverage as a ``standard'' level. Anyone buying PIP insurance of less than the standard amount must sign a waiver statement.
Under PIP insurance, drivers automatically have the minimum coverage that is required in other states and Canada when the vehicle is operated there.
PIP Insurance for Pain and Suffering. Under this measure, a person generally could not sue another driver for losses--including pain and suffering. The measure, however, requires insurance companies to make available insurance that pays up to $250,000 for pain and suffering resulting from a permanent and serious injury. Drivers would buy this insurance to cover costs for pain or suffering experienced by themselves, their passengers, and their families. The amount of payment for any given case would be determined by a schedule to be established by the Insurance Commissioner. Insurance companies could also offer pain and suffering policies that pay benefits for all injuries, not just permanent and serious ones.
Assigned Claims Plan. The measure requires all insurers authorized to provide PIP benefits to participate in an Assigned Claims Plan. This plan would pay PIP benefits for certain accidents involving uninsured vehicles. For example, the plan covers a pedestrian who does not own a car and is hit by an uninsured vehicle. Children (under 18) whose families do not have PIP coverage would also be covered under the plan if injured or killed in uninsured vehicles.
Insurance Premiums. Consistent with current law, the measure allows an insurance company to charge rates (or premiums) for PIP insurance coverages subject to approval by the Insurance Commissioner. While fault would no longer be a factor in determining who is responsible for injuries and losses, the measure still allows fault to be a factor in determining the premiums charged to individual drivers. Specifically, the measure prohibits an insurance company from increasing anyone's premiums as a result of claims for PIP benefits unless the person is found to be 51 percent or more responsible for the accident.
Prompt Payment of Claims. The measure requires insurers to pay PIP claims within 30 days of the time the insurer receives documentation of the accident. The insurer must pay a 24 percent annual interest rate on late payments.
Self-Insurance. Consistent with current law, the measure allows businesses to self-insure their vehicles. The measure sets forth requirements for qualifying as a self-insurer. These requirements are designed to guarantee that a self-insurer has the financial capacity to handle anticipated claims. Under the measure, government-owned vehicles are automatically deemed self-insured.
Fiscal Effect
This measure would have several major fiscal impacts on state and local governments. In summary, we estimate that the measure would result in major annual savings to the state and local governments and major annual revenue losses to these governments. As discussed below, these impacts would vary by governmental entity. The net impact on the public sector as a whole is unknown.
Health Care Savings. Under current law, the state and counties provide basic and emergency health care services to low-income persons who have no medical insurance. As a result, when they are injured in automobile accidents, the state and counties pay for much of the medical costs incurred. Under this measure, many of these costs would instead be borne by PIP insurance. We estimate that the measure would result in savings to the state and counties, potentially over $100 million annually.
Loss in Vehicle Registration Revenues. Currently, there are over 25 million cars registered in the state. Vehicle owners pay registration and license fees annually to the state and local governments. There are, however, several million people who register their vehicles but fail to obtain automobile insurance. Under this measure, people could not register their cars unless they had this insurance. It is likely that many of these uninsured drivers who currently register their vehicles would no longer do so. Consequently, state and local governments would lose revenues in the tens of millions of dollars annually, potentially exceeding $100 million annually.
Savings From Reduced Claims for Bodily Injury Against State and Local Governments. The state and most local governments self-insure their own vehicles for employees to use for government business. When these employees are liable for damages caused in automobile accidents, the government pays claims to those who suffer damages. In 1994-95, the state paid approximately $16 million in motor vehicle claims and associated legal fees for bodily injury or death. The state receives significantly less than this for its own claims against drivers of nonstate vehicles. Under this measure, the state would realize savings by not incurring these net costs. Based on this estimate at the state level, the annual savings to state and local governments could be in the tens of millions of dollars annually.
Loss in Gross Premiums Tax Revenue. Under current law, insurance companies doing business in California pay a tax of 2.35 percent of ``gross premiums.'' This tax is called the gross premiums tax. The measure would affect, in several ways, total premiums paid for automobile insurance. This--in turn--would also affect state General Fund gross premiums tax revenues. For instance, total premiums paid for automobile insurance would decrease because insurers would no longer pay costs associated with lawsuits for death and bodily injury. On the other hand, total premiums paid would increase because some people who currently do not purchase automobile insurance would do so under this measure. The net impact would probably be a revenue loss, potentially greater than $10 million annually.
Decreased Health Insurance Costs to State and Local Governments. Under the measure, persons injured in automobile accidents would receive medical benefits from PIP insurance before receiving any benefits from their health insurance policies. This could result in lower premiums paid by state and local governments for employee health care insurance.
State Administration. The measure would increase state administrative costs to: (1) adopt regulations that are in accordance with the measure, (2) ensure that carriers are in compliance with these new regulations, and (3) verify insurance coverage before issuing or renewing motor vehicle registrations. We estimate that start-up costs would be about $15 million, with costs of about $10 million annually thereafter.
