Crash cow.

• Author: Segal, David
• Position: Two alternatives in automobile insurance compensation

Imagine this scene: Before leaving for a weekend with the family, a guy from the suburbs--call him Bob--turns on his crockpot to slow cook a brisket. The machine overheats, starts a fire and burns up half of his split-level, two-bath/three-bedroom home. A day later a contractor sifts through the rubble and announces that chez Bob's original splendor can be restored for $100,000. No problem. Bob's got insurance. But the agent who last year, all winks and handshakes, sold Bob the policy, soon announces that the insurance company will be writing a check for $45,000, about enough to replace the living room, the linoleum, and the salad shooter. Adding insult to under-reimbursement, the check isn't mailed for six months.

Isn't Bob a sap? Before deciding, consider this: You are Bob. That is, if you are among the roughly 150 million Americans who drive a car and buy auto insurance, odds are that in the event of disaster, you'd get the Bob treatment. A 1991 Rand study which looked nationwide at auto insurance compensation found that people sustaining $100,000 in economic damage--like property damage, lost wages, and medical costs--can expect to receive about $45,000 in compensation. And it'll be a while before you see even that much.

It's just one of the gut-tightening realities of the American auto insurance system. Besieged by lawyers and clotted with the insurance industry's administrative costs, the premiums you pay are disbursed to everyone, it seems, but the folks who need it most. According to a national study sponsored by the California Insurance Commissioner's office, only 45 cents of the average insurance dollar goes to car repairs and hospital bills. More than a quarter of those in accidents don't recoup their medical costs from their insurers, and the heftier those bills are, the more of the tab you have to pick up yourself.

What's gone wrong? Consider a typical accident. Driver X, waiting in traffic to take a left, collides with Driver Y. Exchanging phone numbers over a steaming radiator, X thinks that Y should have seen him making the turn, and is certain that Y was speeding. Y, for his part, was stunned by X's left and believes X should be stretched on a rack. The truth, as with many accidents, is somewhere in the middle, but to get money for damages, X and Y will need to prove in court that the other guy is entirely at fault. Both men hire lawyers and a brawl as American as slapstick begins.

It'll be an expensive fight, and not just for the litigants. In 1992, there were roughly four million two-party accidents involving injuries and in a little over one third of those incidents, a lawyer got a job. Naturally, a system that relies on lawyers and the courts to settle car claims--the tort system, as it's known--is expensive, and insurance companies simply pass on the costs to everyone else in the form of higher premiums. Roughly 19 cents of your premium dollar covers legal fees.

These fights are not simply over actual out-of-pocket expenses, like car repairs and the price of whiplash, but for the mental trauma of the ordeal and the injury. Pain and suffering awards are usually a multiple of medical bills, which means they create a built-in incentive to perpetrate fraud--i.e. fake it with one of those nothing's-broken-but-trust-me-it-hurts soft tissue injuries--or find the most expensive treatment possible. A Los Angeles County study of health care visits for neck and back strain injuries found that in those instances where a tort claim was involved, a doctor or chiropractor was seen 26 times at an average cost of $4,000 per claim. Nationwide, when the same injuries are involved but there's no lawsuit in the offing, the average number of visits is between two and three. Similarly, a study of Hawaii's auto tort cases found that claimants averaged 58 visits to the chiropractor, with one quarter of those injured visiting at least 84 times each.

We've created a system that gives people involved in accidents a good financial incentive to get a lawyer, seek therapy, and go for the gold. What we end up with is a lot of Bob-types who don't get sufficient money to cover large, concrete losses, and scores of aspiring litigants who are overcompensated for less serious injuries and mental anguish--some of which is real, some of which is mild at best and fraudulent at worst. About 9 cents out of each insurance dollar you mail in is for somebody else's pain and suffering.

The kicker is that the present system would gouge consumers even if nobody got in accidents. That's because insurance companies spend millions on advertising to get you in the door, and even more on the salaries and offices of retail agents who gladhand you to the dotted line. Add to that the price of paperwork and postage for handling millions of car insurance policies individually, and you get some idea why 23 cents of your premium dollar is consumed by insurance company overhead. Considering that you just want these folks to cash your checks and pay something back when you get in a wreck, they aren't cheap.

Present arrangements have a short list of clear winners: the lawyers, (who usually get one third of the victim's winnings), the lucky (those hit by someone rich or well insured and clearly at fault), and the insurance companies (who make money regardless). The list of losers runs a bit longer. It's everybody else. Drivers pay too much for policies that won't adequately reimburse...