AUTOMOBILE INSURANCE AND COMPENSATION STUDY

WEDNESDAY, OCTOBER 7, 1970

U.S. SENATE,

COMMITTEE ON COMMERCE,

Washington, D.C.

The committee met, pursuant to notice, at 10:10 a.m. in room 5110, New Senate Office Building, Hon. Warren G. Magnuson (chairman of the committee) presiding.

Present: Senators Magnuson, Pastore, Hart, and Cotton.

OPENING STATEMENT BY THE CHAIRMAN

The CHAIRMAN. The committee will come to order.

The Chairman has a short opening statement. We are pleased to have the Secretary and the other staff people who were involved in this study with us today.

The committee today will receive testimony from the Secretary of Transportation on the results of the automobile compensation system which Congress directed the Department of Transportation to undertake a little over 2 years ago.

Soaring premium rates, increasing numbers of cancellation or nonrenewal notices, long delays in payment, and years of tedious litigation had prompted Congress to suggest and cooperate with the Department of Transportation on this study. Its purpose was twofold: (1) to provide Congress important factual information about the present system-how it works and for whom it works, and (2) to propose changes in the present system if it was found to be inadequate. Unfortunately the administration is not prepared to deliver its final recommendations, even though the May 1970 completion date of the study is past due, and even though Secretary Volpe has cooperated with us since early August to present the study group's final report. However, the Secretary is prepared now to discuss the factual results of the 2-year, $1.6 million study.

On the basis of the facts available at this time, one must conclude that the present system is not adequately serving policyholders, accident victims, or the general public.

The present auto insurance system compensates less than half of our seriously injured auto accident victims. By contrast, the policyholders with small claims are paid more than four times their out-of-pocket loss.

Almost 10 percent of the policyholders in this country are in the hard-to-place insurance market. As many as 15 percent of the drivers in this country might be operating vehicles today on the highways without insurance.

Staff member assigned to this hearing: S. Lynn Sutcliffe.

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So we look forward this morning to developing more fully the factual picture of this automobile compensation system. And the committee is pleased to have the Secretary here to present his remarks and to answer such questions as the committee may have.

Before we hear from Secretary Volpe, let me state my firm belief that the facts now show fundamental national flaws in our automobile compensation system that demand some innovative national solutions, solutions which this committee will vigorously pursue in the coming months.

Let me say, also, a word about the factfinding phase of the study, which is now complete. The study to date has been conducted in my opinion in a highly professional bipartisan manner.

Its 18 fact-filled volumes represent a major achievement in cooperation between the Congress, the administration, and the insurance industry. These volumes contain an impressive array of information and statistics whose quality is appreciated by the committee and acknowledged by experts throughout the country.

I want to commend the study staff for the excellent job they did in gathering the facts. Usually others get all of the credit for a job well done. But I would like to single out of the staff for special commendation, particularly Richard Walsh, the staff director, and Dr. Lee Huff, who planned much of the study.

So we appreciate having you all here today and we will be glad to hear from you, Mr. Secretary.

STATEMENT OF HON. JOHN A. VOLPE, SECRETARY OF TRANSPORTATION; ACCOMPANIED BY RICHARD J. BARBER, DEPUTY ASSISTANT SECRETARY FOR POLICY; LEE W. HUFF, DIRECTOR OF ECONOMIC STUDIES AND PROJECTS; AND RICHARD F. WALSH, DIRECTOR OF OPERATIONS, AUTO INSURANCE STUDY

Secretary VOLPE. Thank you very much, Mr. Chairman, and members of the committee. May I first of all express our appreciation for your generous remarks, particularly those regarding the nonpartisan nature of our efforts and the commendation you have given to the men who have been most responsible for the study: Dr. Lee Huff on my extreme right; on his left. Dick Barber, the Deputy Assistant Secretary for Policy; and on my left, Mr. Walsh, the staff director.

It is a pleasure for me to be here this morning to discuss the automobile insurance and compensation study directed by Public Law 90-313. The central thrust of that joint resolution is to be found in its statement that "there is needed a fundamental reevaluation of [the existing system of compensation for *** suffering and loss of life resulting from motor vehicle accidents], including a review of the role and effectiveness of insurance and the existing law governing liability.”

The bulk of the research findings of the study have already been published in a series of 18 reports beginning last spring. As you can see, they make quite a substantial volume. Some of them, we believe, allow us to see for the first time from a national perspective, how the present system of motor vehicle accident compensation is serving the American motoring public. Others are designed to view the system, especially the tort liability insurance system from particular perspec

* See p. 47 for S.J. Res. 129 (Public Law 90–313),

tives; for example, that of its impact on the courts and the bar, that of the seriously or fatally injured victim, or that of the claimant who makes an insured tort claim. Others deal with specific aspects of the system such as rehabilitation, the accident repeater problem, accident causation and deterrence, the historical roots and rationale of the tort liability system, the hard-to-insure driver, et cetera. These research findings constitute the core of the study's work.

Of course, in grappling with important public policy issues, the piling up of facts, research findings, and expert opinions seldom leads automatically to easy solutions, and nowhere have I found this to be more true than in the matters we will discuss today-accidents, accident losses, and accident loss compensation. Motor vehicle accidents kill tens of thousands and injure millions of our citizens every year. Their immediate economic consequences run into the billions of dollars, as do both the benefits received by their victims and the costs of delivering those benefits.

In addition, these accidents involve great human and social costs, which are just as real, if more difficult to measure and comprehend, as their more direct economic consequences.

For society as a whole, these costs can be viewed as part of the price of the great freedom and flexibility that motor vehicle transportation gives both the individual and the economy. For the victim, however, his accident costs would often mean great economic hardship or even ruin if they had to be borne without help. For this help, the victim looks to the mechanism which society provides for compensating him for his losses-the motor vehicle accident compensation system.

The study indicates that the main problems currently afflicting this system stem basically from the legal rules governing reparations, from the operation of the insurance mechanism, and from the great and growing costs of the accidents themselves.

The spiraling costs of accidents, which auto insurance premiums partially reflect, should first be attacked directly by measures which stimulate safe driving behavior and which improve the driving environment and, thereby, work to reduce the frequency of accidents and the severity of the resulting losses. The discovery and promotion of such measures is a major continuing responsibility of our Department. Accident loss reduction efforts, however, while vitally important, cannot be viewed as the sole, or even the principal, answer to the problems of the compensation system. The Department knows from its work in the auto safety field that even assuming that the most optimistic predictions of future accident loss reduction prove justified, we must unfortunately expect that large numbers of people will continue to be injured and killed in automobiles accident and that damage to property, especially vehicles, will not soon be significantly curbed.

FACTUAL RESULTS

The operation of our present motor vehicle accident compensation system has been described and documented by commentators and scholars over the course of nearly a half a century. The legislative history of Public Law 90-313, itself, indicates clearly that the Congress was concerned about problems in the system, although better quantification and more detailed analysis were felt desirable.

The CHAIRMAN. I don't like to interrupt. but I want to suggest that no one has experimented more with the problem of automobile insurance and the things you talk about than the State of Massachusetts.

Secretary VOLPE. I am aware of that and was right in the middle of a good deal of that.

The CHAIRMAN. And Rhode Island and Connecticut, for some reason, they were busy with it all of the time. A lot of trial and error took place there, so you have a good background.

Secretary VOLPE. Just a little bit.

Senator PASTORE. And yet they haven't solved the problem. The CHAIRMAN. That is right. That is why we are here today. Senator PASTORE. It is a hot potato still today in Massachusetts, isn't it, John?

Secretary VOLPE. That is right.

(Continuing his prepared statement. What the Department's study has done is try to look at the system from a national rather than a regional perspective, produce fresh and thorough quantitative data about the system's operation, and provide basic data upon which we will consider how the system might be improved or changed to better serve the needs of the American motoring public.

LIMITED SCOPE OF THE LIABILITY INSURANCE SYSTEM

Under the auto accident liability system, only those who can prove that others were at fault while they were without fault in an accident have a legal right to recover their losses.

One of the several studies conducted by the Department has shown that only 45 percent of those killed or seriously injured in auto accidents received benefits from the tort liability insurance system. One out of every 10 of these victims received nothing from any system of reparation.

Senator PASTORE. Is that 45 percent figure whether they were right or wrong?

Secretary VOLPE. Yes, sir.

Senator PASTORE. Even though they might have been in the right, it is only 45 percent?

Mr. WALSH. No. This particular statistic includes all accident victims.

Senator PASTORE. All accident victims, whether they were right or or wrong?

Mr. WALSH. Yes, whether they were right or wrong.

Senator PASTORE. Thank you.

Secretary VOLPE continuing his prepared statement).

THE RATIONAL ALLOCATION OF COMPENSATION RESOURCES

Despite the fact that it is generally the accident victim with the large economic losses who also suffers the large intangible losses, as the tort system works in practice, he has a far poorer chance of being fully compensated for his economie loss, let alone any intangible loss, than does the less seriously injured victim. For example, it was found in the study that only about half of the total compensable losses of seriously or fatally injured victims are compensated. For those victims

whose economic losses were more than $25,000, only about a third was usually recovered. Those with relatively small economic losses, by contrast, fared much better. If they recovered from tort and had losses less than $500, they recovered in total an average of four and a half times their economic loss.

EFFICIENCY

The tort liability insurance system as it operates for automobile accident victims has a very high cost/benefit ratio compared to any other major reparations system.

Senator COTTON. Can I interrupt for one question? I may be anticipating something which you cover later in your statement, Mr. Secretary, but has the study differentiated in this matter of uncovered losses as between personal injury and property?

In other words, many people carry a $50 or $100 deductible on their automobile insurance and get back everything except that, even if the other party is not insured.

But I wondered if somewhere along the line the study makes a distinction between those who suffered property loss and those who suffered loss from physical injuries?

Secretary VOLPE. It definitely has, Senator.

Senator COTTON. Does that come later in your statement?
Secretary VOLPE. Yes, sir.

Senator COTTON. Then, I am sorry and I beg your pardon for interrupting you.

Senator PASTORE. Isn't there another point here? Within this category aren't we talking about people who did not have insurance as against people who suffered damage and collected from the defendant? Secretary VOLPE. Yes, there are those two aspects, also.

Senator PASTORE. Is that going to be analyzed in the report? Because I can understand if you have insurance you recover-except for the $100 deductible you don't have any trouble recovering in that case because you have insured yourself. Whether you are right or wrong, you collect.

But is there a distinction being made as against those who are not covered in that respect, but who are injured there through someone else's negligence and their recovery is less than $500?

Mr. WALSH. Sir, in our study of the fatally and seriously injured victims, we took account of all sorts of reparations, both the first and third party auto reparations and, in addition, all other reparations, i.e., social security, veterans' benefits, private loss insurance, life insurance, anything that might have gone into reparating the victims' losses. Those various kinds of compensation sources are differentiated in the two-volume study, "Economic Consequences of Automobile Injuries." Senator PASTORE. I was directing my question to what Mr. Volpe just said, in the instance where the damage is not in excess of $500, the recovery has been good. Now, are we talking about personal injuries or property damage?

Mr. WALSH. We are talking about all kinds of economic loss, both property damage and personal injury.

Senator PASTORE. Within that figure of $500?

Mr. WALSH. Yes, sir.

Senator PASTORE. Thank you.

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