The dilemma of minimum auto insurance coverage limits
There are an average of 6 million auto accidents annually, costing $800 billion in lost productivity, injuries and damage.
No one disputes the American love affair with vehicles. American muscle cars are quite popular among many, and while 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 American roadways, with 227 million licensed drivers. Unfortunately, the love of driving doesn’t make us good at it, as there are an average of 6 million accidents each year. The annual cost of these accidents for property damage, injuries, lost productivity and other expenses is $800 billion.
Because of these costs, states require drivers to carry insurance that provides coverage for injuries and property damage, both for the insured and any innocent parties that may be involved in an accident — otherwise known as financial responsibility minimum limits. This coverage allows people to be made whole after an accident, so their injuries can be treated and their vehicles or other damaged property can be repaired or replaced.
Coverage is provided based on a maximum amount per individual injured, a maximum amount per accident for all injured parties and property damage. Limits of $20,000 per individual, $50,000 for all injured parties and $10,000 for property damage would be displayed 20/50/10.
For example, an insured has an accident injuring two people and damaging the vehicle in which they are riding. The first person’s injuries cost $25,000, the second person’s injuries cost $10,000 and the damage to the vehicle is $9,000. If our insured’s limits are 20/50/10, the first person will only receive $20,000 since his injuries exceed the individual limit; the second person will receive $10,000 since that is the cost of her injuries and it is within the total amount per accident; and there will be $9,000 for the damage to the vehicle.
The challenge of setting coverage minimums
The dilemma arises when it comes to determining just how much insurance drivers should be required to have. Ideally, each driver should have enough coverage to pay for all injuries to other parties and to repair or replace all 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 totaled in an accident, many are, and there are many new vehicles on the road, as well. There are also plenty of accidents where more than one vehicle is involved. The minimum limit for property damage in roughly half the states is $25,000; the rest of the states have lower limits — some as low as $5,000.
Premiums for those 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 prohibitive to many. Some people are paying higher monthly premiums for basic limits than others pay in a whole year for higher limits.
If a state requires insurance limits of 100/300/100, many may not be able to afford the coverage and will drive uninsured, having the exact opposite of the desired effect. The question is, what limits are reasonable enough to protect the public in general but let as many people as possible buy insurance?
New Jersey faced this dilemma in June. Various reform bills have been presented that would require liability limits to be increased. One bill called for increasing personal injury protection (PIP) to $250,000, and another bill would have prohibited drivers from using private health coverage to pay for PIP in exchange for a premium discount. The bill that has been approved by an assembly committee would increase liability requirements to $25,000 as of 2023, and to $35,000 in 2026.
Those in favor of the bill state that the coverage needs to be increased, and that the average settlement for an auto accident is $18,000, which is above current minimum limits. Others state that those with lower incomes are financially strapped, especially now, and increasing the minimum limit will cause further economic hardship on lower-income families and more people will drive without the required coverage because they can no longer afford it. When a person has to weigh housing, food, medications and other basic necessities, auto insurance unfortunately often falls to the wayside.
Finding coverage
More uninsured drivers on the road will force insured drivers to turn to their own coverage in event of an accident. Because of this, many states require a certain amount of uninsured motorist (UM) or underinsured motorist (UIM) coverage as well. Some states require the UM/UIM limits to match the liability limits on the policy, while other states allow an insured to carry different limits. So, an insured carrying limits of 100/300/100 could be carrying limits of 25/50/25 for uninsured motorist coverage. However, this puts the insured at risk of being uninsured. If he has a serious accident with an uninsured motorist, his lower limits may not cover all his medical expenses or the cost to replace his vehicle. People sometimes assume that they don’t need to worry about uninsured motorists because auto insurance is required by the state, but statistics show that as of 2021, there were 28 million uninsured motorists on the road.
States try to balance the need for every driver to have insurance coverage with the ability of every driver to pay for that coverage. Determining what minimum limits are enough to protect people in an accident while keeping the cost of insurance affordable for all is a challenge faced by all insurance departments.
Christine G. Barlow, CPCU, (cbarlow@alm.com) is the executive editor of FC&S Expert Coverage Interpretation, the authority on insurance coverage interpretation and analysis for the P&C industry.
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