An Economic Analysis of Auto Compensation Systems: Choice Experiences From New Jersey and Pennsylvania

• Published in: The Journal of risk and insurance Vol. 70; no. 4; pp. 601 - 628
• Main Authors: Schmit, Joan T., Yeh, Jia-Hsing
• Format: Journal Article
• Language: English
• Published: 350 Main Street , Malden , MA 02148 , USA , and 9600 Garsington Road , Oxford OX4 2DQ , UK Blackwell Publishing 01.12.2003; The American Risk and Insurance Association; Blackwell Publishing Ltd
• Series: Journal of Risk & Insurance
• Subjects: Attorneys; Automobile accidents; Automobile drivers; Automobile insurance; Compensation; Costs; Debates; Economic systems; Injuries; Insurance claims; Insurance coverage; Insurance premiums; Jurisdiction; Liability insurance; Negligence; No fault insurance; Payments; Risk aversion; Torts; Unemployment
• ISSN: 0022-4367; 1539-6975
• DOI: 10.1046/j.0022-4367.2003.00067.x

Nearly since the first automobile traveled on U.S. soil, questions about how best to compensate people injured by their use have been raised. As early as in 1932, in fact, the tort system of imposing costs on negligent drivers was strongly criticized, and a system of compensation without regard to negligence recommended. Yet despite various efforts to identify and implement improved systems during the past more than 70 years, no clear best compensation mechanism has been found. Current discussions have focused on the "choice" system, under which insureds are allowed to select either a tort system or a no-fault system of compensation at the time of insurance purchase. New Jersey and Pennsylvania, which implemented very similar choice programs in 1989 and 1990, respectively, offer an opportunity to observe the effects of choice on outcomes such as: use of attorneys, speed of payment, and consistency (equity) of payment. Our results indicate outcomes consistent with expectations in New Jersey (NJ), which switched from no-fault to choice, but inconsistent with expectations in Pennsylvania (PA), which switched from tort to choice. Furthermore, analysis of tort versus no-fault selectors postchoice in New Jersey and Pennsylvania does not offer clear evidence of no-fault's lower administrative costs and speedier, more equitable payment in these jurisdictions.