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What such arithmetic means, say insurance men, is that from 1956 to 1966 the industry paid out $1.6 billion more in liability claims than it received in premiums. Critics answer that this "underwriting loss" actually stems from the unusual accounting used in seeking higher rates. For one thing, the companies put aside a large portion of their premiums as "unearned reserves," count them as a nontaxed liability—and then invest them along with other reserves. And when it comes to setting rates, critics add, the companies refuse to consider their investment profits. Still the industry's overall profits are less than 6%—just about the lowest of any major U.S. business. It is only by dipping into investment income that many auto insurers stay in the black.
Chief source of their trouble is the widely misunderstood liability coverage—which is quite unlike other forms of insurance. When a person buys fire, medical or collision insurance, his company pays him directly for his losses. But a liability policy does not protect a driver against the cost of injury to himself; it protects him against the possibility of having to pay for someone else's injuries in the event that a court finds him at fault. Once that happens, the driver's company must pay the judgment against him. And with its own money at stake, the company usually tries to beat down the victim's claims, however just. As damage awards mount, the industry compensates for its losses by raising everyone's premiums. But even when a company wins in court and does not have to pay a claim, it may still retaliate against its policyholder by canceling his insurance, a fate that makes other companies regard him as such a poor risk that he finds it very hard to buy a new policy.
Preferred Risks
Compounding this recipe for hostility between all parties is the difficulty of assessing the legal responsibility for auto accidents. In the six states* that have "comparative negligence" laws, a victim who is partly responsible for a crash can recover a proportionate percentage of his losses. In the other 44 states, unless the victim can prove that the policyholder was entirely at fault—and that he himself was utterly blameless—the company need not pay him a cent. Indeed, the worse the accident—a ten-car chain collision, for example—the more difficult it usually is to pin sole blame on one driver and reimburse anyone. If a driver has a heart attack and his car mounts a curb, hitting ten pedestrians, who is at fault? No one. Who gets paid? No one.
Almost inevitably, the fault system results in wildly erratic settlements. Insurance companies are notorious for overpaying small "nuisance" claims because it would cost more to fight them than to settle. At the same time, the seriously injured victim with high economic losses is often unable to wait for his case to come to trial and is forced to settle for whatever the company offers. If he does gamble on going to court, he may lose the case and get nothing. On the other hand, if he wins he may hit the jackpot.