Auto No-Fault and First-Party Insurance: Advantages and Problems

Auto no-fault replaces liability (and liability insurance) with compulsory first-party insurance. However, American no-fault plans take the form of a hybrid of tort and no-fault (unlike no-fault plans in several jurisdictions outside the United States, which are no-fault all the way). In reviewing the advantages of no-fault - by way of effectively compensating accident victims and also reducing the overhead of the legal system - this Article concludes that hybrid plans are so compromised as to prompt little enthusiasm. Accordingly, those who favor no-fault should insist on pure no-fault. The heart of the Article considers the relevant objections to auto no-fault. A standard objection is that no-fault is unfair, or fails to provide appropriate deterrence, insofar as it removes liability from the shoulders of the negligent driver. This objection fails to appreciate a basic point. Bad driving that imperils third parties imperils motorists as well. Accordingly, no-fault insurers - in this regard resembling liability insurers - will raise premiums to take the motorist's bad driving into account. In light of this, the standard objection to no-fault is significantly overstated. The Article goes on to identify what it regards as the most important objection to auto no-fault. Under no-fault, the insurance premiums assigned to heavier passenger vehicles (both full-size cars and light trucks) will decline sharply, while the premiums assigned to lighter vehicles (compacts and subcompacts) will increase sharply. This is not due to the inherent safety of heavy vehicles or the inherent unsafety of lighter vehicles, but rather to the interaction between the two: when a heavier vehicle and a lighter vehicle collide, it is the latter's occupants that suffer the more severe injuries. In these circumstances, to reallocate insurance premiums away from heavier vehicles towards lighter vehicles would be unfair, and would produce inappropriate incentives for the purchase of passenger vehicles. To be sure, the problem can evidently be dealt with by regulatory controls on no-fault insurance practices, but such controls would inevitably be awkward.