No one disputes America’s love affair with vehicles. American muscle cars are very popular among many others, and although automatic transmissions have been around for a long time, there are still those who like to drive a manual. There are 284 million vehicles on US roads, with 227 million licensed drivers. Unfortunately, the love of driving does not make us good, because there are an average of 6 million accidents every year. The annual cost of these accidents in property damage, injuries, lost productivity and other expenses is $800 billion.
Because of these costs, states require drivers to carry insurance that covers personal injury and property damage, both to the insured and to any innocent party who may be involved in an accident – otherwise known as minimum limits of financial responsibility. This coverage allows people to be cured after an accident, so that their injuries can be treated and their damaged vehicles or other property can be repaired or replaced.
Cover is provided on the basis of a maximum amount per injured person, a maximum amount per accident for all injured parties and property damage. Limits of $20,000 per person, $50,000 for all injured parties and $10,000 for property damage would be posted on 50/20/10.
For example, an insured has an accident injuring two people and damaging the vehicle in which they are. First person injuries cost $25,000, second person injuries cost $10,000 and vehicle damage is $9,000. If the limits of our insureds are 20/50/10, the first person will only receive $20,000 since their injuries exceed the individual limit; the second person will receive $10,000 since this is the cost of his injuries and it does not exceed the total amount per accident; and there will be $9,000 for damage to the vehicle.
The challenge of setting minimum coverage
The dilemma arises when it comes to determining how much insurance drivers should be required to have. Ideally, each driver should have sufficient coverage to pay for all injuries to other parties and to repair or replace any vehicles or property damaged in the accident.
Ideal, however, is not always practical or realistic. In 2021, the average cost of a used vehicle was $26,700. While most vehicles aren’t destroyed in a crash, many are, and there are plenty of new vehicles on the road as well. There are also many accidents where more than one vehicle is involved. The minimum limit for property damage in about half of the states is $25,000; the rest of the states have lower limits – some as low as $5,000.
Premiums for these higher limits are more expensive. Likewise, those with accidents and violations on their driving record are charged more for insurance, and the combination of the two factors can be prohibitively expensive for many. Some people pay higher monthly premiums for basic limits than others pay in a full year for higher limits.
If a state mandates 100/300/100 insurance limits, many may not be able to afford coverage and will drive without insurance, which will have the exact opposite of the desired effect. The question is, what limits are reasonable enough to protect the general public while allowing the greatest number of people to buy insurance?
New Jersey faced this dilemma in June. Various reform proposals have been presented which would require an increase in liability limits. One bill would increase Personal Injury Protection (PIP) to $250,000, and another bill would have prohibited drivers from using private health insurance to pay for PIP in exchange for a reduction in prime. The bill that was approved by a committee of the assembly would increase liability requirements to $25,000 beginning in 2023 and $35,000 in 2026.
Proponents of the bill say coverage needs to be increased and the average settlement for a car accident is $18,000, which is higher than current minimum limits. Others say low-income people are strapped for cash, especially now, and that raising the minimum limit will cause additional economic hardship for low-income families and more people will drive without the required coverage. because they can’t afford it anymore. When a person has to weigh housing, food, medicine and other basic necessities, car insurance unfortunately often falls by the wayside.
More uninsured drivers on the road will force insured drivers to turn to their own coverage in the event of an accident. For this reason, many states also require some coverage for Uninsured Motorist (UM) or Underinsured Motorist (UIM). Some states require UM/UIM limits to match policy liability limits, while other states allow an insured to carry different limits. So an insured carriage limit of 100/300/100 could be a 25/50/25 carriage limit for uninsured motorist coverage. However, this exposes the insured to the risk of not being insured. If he has a serious accident with an uninsured motorist, his lower limits may not cover all of his medical expenses or the cost of replacing his vehicle. People sometimes assume they don’t have to worry about uninsured motorists because car insurance is required by the state, but statistics show that in 2021 there were 28 million uninsured motorists on the road.
States try to balance each driver’s need to have insurance coverage with each driver’s ability to pay for that coverage. Determining what minimum limits are sufficient to protect people in the event of an accident while keeping the cost of insurance affordable for everyone is a challenge faced by all insurance services.
Christine G. Barlow, CPCU, ([email protected]) is the editor of FC&S Expert Coverage Interpretation, the authority on insurance coverage interpretation and analysis for the P&C industry.
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