A UTO C HOICE: I MPACT ON C ITIES AND THE P OOR A J OINT E CONOMIC C OMMITTEE S TUDY Joint Economic Committee G-01 Dirksen Building Washington, DC 20510 Phone: 202-224-5171 Fax: 202-224-0240 Internet Address: http:/ / www.house.gov/ jec/ U.S. Representatives Dick Armey (R-TX) Jim Moran (D-VA) U.S. Senators Rod Grams (R-MN) Joseph I.
Lieberman (D-CT) Mitch McConnell (R-KY) Daniel Patrick Moynihan (D-NY) P REPARED AT THE R EQUEST OF: March 1998 A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR E XECUTIVE S UMMARY The current system of paying for auto injuries suffers from two fundamental problems: premiums are too high and victims with serious injuries rarely receive full compensation. Of particular concern is how the shortcomings of the present tort liability system adversely impact low-income and urban households. This paper reviews the causes and consequences of a costly and inefficient auto insurance system, and discusses the benefits and savings that the Auto Choice reform would produce.
Shortcomings of the Current Auto Insurance System " Excessive and unnecessary fraud, litigation, and injury claims have pushed the average insurance premium to over $774 in 1996, and the cost to insure an automobile is rising faster ... more. less.
than the rates of inflation for food, energy, housing, and medical care. " The current tort system fails to fully compensate serious injuries. On average, victims with losses between $25,000 and $100,000 recover only about one-half (56 percent) of their losses, while those with losses over $100,000 recoup just 9 percent of their losses.<br><br> " The perverse incentives of the tort system result in widespread fraud and abuse. According to the RAND Institute for Civil Justice, upwards of 35 percent of injury claims are unnecessary. Problems for Urban Drivers " Auto insurance in inner cities is prohibitively expensive.<br><br> The average premium for a 38- year-old female with a clean driving record in central Los Angeles is nearly $3,500 per year. " All of the problems that plague the tort liability system 3 fraud and abuse, excessive litigation and uninsured motorists 3 are worse in inner cities. As a result, it costs 47 to 57 percent more to pay injury claims in cities than in other areas.<br><br> " Uninsured motorists are a widespread problem for many cities. Some areas in Los Angeles and San Diego are estimated to have uninsured motorists rates over 90 percent. " Since the cost to provide insurance in urban areas is so much greater, there are often large disparities in premiums between inner cities and suburbs, frequently exceeding $1,000.<br><br> " Although accidents in cities are less severe than accidents elsewhere, they are much more likely to result in an injury claim. For example, for every 100 accidents in Los Angeles, there are roughly 99 bodily injury claims, over twice the average for the rest of California. " Because high premiums make it more difficult to own a car, many low-income, inner-city workers are unable to access better-paying suburban jobs.<br><br> Problems for Low-Income Families " When families in the bottom income quintile buy auto insurance, they spend seven times the percentage of their household income on auto insurance as do families in the top quintile. E XECUTIVE S UMMARY , C ONT . " Families earning less than half of the poverty line spend an average of one-third (31.6 percent) of their income on premiums when they buy auto insurance.<br><br> Moreover, half of all families making less than twice the poverty line have to put off paying for other major expenses such as food, rent or mortgage payment in order to pay their auto premium. " The problem of costly auto insurance is exacerbated for many poor families because they reside in large cities where liability premiums are already excessively high. " High premiums add to the transportation obstacles that impede welfare reform.<br><br> Research indicates that owning a car makes it 12 percent more likely that a welfare recipient will work. " The regressivity of the current system is heightened by that fact that the typical low-income household spends more on auto insurance in two years than the value of their car. Problems for State and Local Governments " Automobile cases are the most common type of tort litigation brought against government, accounting for 44 percent of all tort cases where the government is the primary defendant.<br><br> " Government agencies are the defendant in 29 percent of jury verdicts in excess of $1 million, even though they represent less than 8 percent of all such jury verdicts. " Nationwide, local governments spent approximately $8.5 billion on all forms of litigation in 1991, and for roughly one in five such costs grew by over 30 percent during 1991 and 1992. " State Medicaid programs pay for close to 10 percent of all medical costs resulting from auto accidents, totaling $1.7 billion in 1994 alone.<br><br> Benefits of Auto Choice " Auto Choice would reduce overall premiums by 24 percent nationwide, averaging $184 per car. For a low-income household, these savings are the equivalent of five weeks of free groceries or nearly four months of electric bills. " Auto Choice would make over $35 billion in savings available to consumers in 1998, and up to $193 billion over 1998-2002.<br><br> " Since low-income families often forgo the optional collision and comprehensive property damage coverage, their personal injury savings represent a larger share of their overall premium 3 36 percent on average. " Auto Choice would increase the amount of compensation available to many seriously-injured victims. The additional health coverage is of greatest value to low-income households who lack sufficient private health insurance.<br><br> " City governments would benefit from a dramatic reduction in lawsuits, since they would no longer be a cdeep pocket d for pain and suffering lawsuits that involve city buses and cars. " Lower auto insurance premiums will make owning a car more affordable for the poor, thereby allowing them to find and hold down better-paying jobs that require a longer commute. " Auto Choice promises to greatly reduce the disparity in premiums between cities and suburbs, which would both encourage some city residents not to move elsewhere as well as to reduce the pressure to force suburban drivers to subsidize urban drivers.<br><br> A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR I. I NTRODUCTION The current auto insurance system suffers from numerous shortcomings, and these problems are painfully felt by virtually everyone who buys auto insurance. Excessive and unnecessary fraud, litigation and injury claims have pushed the average insurance premium to more than $774 in 1996.<br><br> The cost to insure an automobile is rising one-and-one-half times faster than the rate of inflation, outpacing the growth in costs for food, energy, housing, and even medical care. 1 Despite more money being paid into the system, however, accident victims with serious injuries are not being fully compensated for their losses. The current system of compensating people through a third-party tort liability system, therefore, results in the worst possible combination: high costs and low benefits.<br><br> The problems of cost and compensation are felt by everyone who purchases auto insurance, but some of the biggest losers are low-income families and inner-city residents. For these consumers, the way the current system operates often appears extremely inequitable. The intensity of feelings on auto insurance is reflected in an editorial from the African-American newspaper The Philadelphia Tribune : There is one issue that impacts more Philadelphians than all of the crimes committed in any given month and that is the (criminal) auto insurance rates Philadelphians are FORCED to pay simply because they live within the city.<br><br> Because state law mandates that all motor vehicle owners must have insurance to drive those vehicles and because many Philadelphians are required to pay auto insurance rates far in excess of the value of the vehicles they drive, many Philadelphians are committing a crime because they are driving without the legally required auto insurance. Curiously, none of these tough on crime candidates is addressing the issue of usurious auto insurance rates which has turned thousands of otherwise law abiding Philadelphians into criminals. Many city residents see a better option in becoming petty criminals than impoverishing themselves by paying the highest auto insurance rates in the nation.<br><br> 2 1 National Association of Insurance Commissioners, State Average Expenditures & Premiums for Personal Automobile Insurance in 1996 (Kansas City, MO: National Association of Insurance Commissioners, 1998), Table 3; and U.S. Department of Labor, Bureau of Labor Statistics, cConsumer Prices Indexes d (1998), online at http://stats.bls.gov/cpihome.htm. 2 Editorial, The Philadelphia Tribune , 10/21/94.<br><br> Capitalization in original. P AGE 2 J OINT E CONOMIC C OMMITTEE The fact that insurance costs, and as a result premiums, are higher in inner cities adds to a perception that the system is corrupt and unfair. Since inner cities are disproportionately poor and nonwhite, some critics have described the problem as a cblack tax d or a cpoor tax. d 3 The problem, however, results not so much from who the policyholders are as from the flawed tort liability system that pushes up costs.<br><br> Unfair or not, premiums are set to reflect the expected costs of paying claims under a liability system that encourages fraud, abuse and litigation. As this paper documents, all of these problems are worse in urban areas. Inner-city residents are therefore beset by what is best termed a ctort tax. d The problem of high rates paid by inner-city residents often is exacerbated by large disparities in premiums between cities and suburbs.<br><br> In Philadelphia, for example, a relatively limited insurance policy for a married adult male with no accidents or traffic violations costs approximately $1,800 each year. Moving to one of the nearby suburbs, however, could cut that amount by more than half 3 a savings of over $900 just by moving out of Philadelphia County. 4 The plight of cities is illustrated by the experience of Washington, D.C.<br><br> Between 1985 and 1994, the number of auto accidents in the District of Columbia fell by 22 percent (Figure 1). Over roughly the same time period (1985-95), however, the number of accident-related lawsuits increased by 137 percent. 5 Clearly, there is a problem with the insurance system when the number (as well as the severity) of accidents is declining, while the number of lawsuits is climbing rapidly.<br><br> 3 See, for example, Mary A. Mitchell op-ed, The Chicago Sun-Times , 7/21/96. 4 Pennsylvania Department of Insurance (Harrisburg, PA: 1995), cited in Insurance News Network, cPennsylvania Auto Insurance Premiums d (1997), online at http://www.insure.com/states/pa/auto/premiums/.<br><br> 5 The Washington Post, 6/23/96. Figure 1. Accidents and Related Lawsuits in Washington, D.C.<br><br> (1985-95) -22% +137% -40% -20% 0% 20% 40% 60% 80% 100% 120% 140% 160% Accidents Accident-Related Lawsuits Source: The Washington Post , 6/23/96. A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 3 The pinch of higher premiums is perhaps felt most keenly by low-income families. Data from the Bureau of Labor Statistics indicate that when families in the bottom income quintile (bottom 20 percent) buy auto insurance, they spend seven times the percentage of their household income on auto insurance as do families in the top quintile.<br><br> 6 The problem is even worse for the very poor. A study of families earning less than half of the poverty line found that when such families buy auto insurance, they spend an average of one-third (31.6 percent) of their family income. 7 Moreover, the study revealed that half of all families making less than twice the poverty line had to put off paying for other major expenses such as food, rent or a mortgage payment in order to pay their auto premium.<br><br> Not surprisingly, when faced with having to make such sacrifices, some drivers choose instead to enter outlaw status as an uninsured driver. The problems are not just isolated to low-income and urban drivers. Suburban and middle- class families also suffer from the same problems in terms of cost and compensation.<br><br> The financial burden of auto insurance is magnified for these families by the fact that the average middle-income household owns two vehicles. 8 Excessively high premiums take money from the family budget that could be better spent on items such as education, health care or a home mortgage. For example, middle-income families on average spent two-and-one-half times more on vehicle insurance in 1995 than on education.<br><br> 9 In addition, high premiums in urban areas result in a large number of uninsured motorists. Suburban residents not only pay higher premiums as a result but also are threatened with financial hardship if they are seriously injured by an uninsured motorist. Finally, the perverse incentives of the tort system put all drivers at risk of being the target of a frivolous lawsuit or being victimized by a criminal fraud ring.<br><br> The root cause of many of the problems associated with auto insurance is the perverse incentives embedded in the tort liability system. These incentives encourage claimants to inflate actual losses in order to recover larger damage awards, mainly in the form of pain and suffering damages. Legal scholar Charles Wolfram notes that c[p]ain and suffering and similar nonmonetary damages probably average three times the monetary damages in personal injury claims. d 10 Since pain and suffering awards are calculated as three times medical and wage loss, there is a powerful incentive to inflate one 9s claimed economic damages and pursue legal action.<br><br> The incentive of pain and suffering awards is clearly seen in the experience of state reforms. In an effort to reduce unnecessary litigation, some states have enacted tort cthresholds d that set a minimum amount of economic loss that must be sustained before litigation can occur. In many cases, the outcome of such reforms is that the threshold becomes a target for claimants who simply inflate their medical claims through additional and often unnecessary visits to the doctor in order to reach the threshold.<br><br> After Massachusetts raised its threshold from $500 to $2,000 in 6 See infra note 112 and accompanying text. 7 Robert Lee Maril, cThe Impact of Mandatory Auto Insurance Upon Low Income Residents of Maricopa County, Arizona d (Unpublished manuscript, 1993), 17. 8 U.S.<br><br> Department of Labor, Bureau of Labor Statistics, c1995 Consumer Expenditure Survey d (1997), online at http://stats.bls.gov/blshome.html. 9 Ibid . Does not include educational expenses funded through tax payments.<br><br> 10 Charles W. Wolfram, Modern Legal Ethics (St. Paul, MN: West Publishing Co., 1986), 528 at note 21.<br><br> P AGE 4 J OINT E CONOMIC C OMMITTEE 1988, the median number of doctor visits rose from 13 to 30 per auto injury claim. 11 In Hawaii, where the threshold was $7,000 in 1990, the median number of visits for claimants who went to chiropractors was 58 per claimed injury. 12 Overall, the RAND Institute for Civil Justice estimates that between 35 and 42 percent of all medical claims occur in response to the incentives of the tort liability system, resulting in $13 to $18 billion in higher premiums in 1993.<br><br> 13 The tort liability system is also extremely inefficient at compensating accident victims. According to the RAND Institute for Civil Justice, accident victims with relatively minor injuries (under $5,000 in economic loss) generally receive compensation worth two to three times the size of their damages. In contrast, victims with economic losses between $25,000 and $100,000 are compensated for roughly one-half (56 percent) of their losses on average, and those with damages over $100,000 can expect to recoup just 9 percent of their losses (see Figure 2).<br><br> 14 As consumer advocate Andrew Tobias described it, cIt 9s like homeowner 9s insurance that pays triple if your stereo 9s stolen (or you say it was) but only 9 percent if the house burns down. d 15 One reason for this failure is that only a small portion of each premium dollar paid for bodily injury liability actually ends up as compensation for real injuries. Based on data from the Insurance Information Institute, less than 15 percent of each premium dollar paid for bodily injury (BI) liability actually 11 Sarah S. Marter and Herbert I.<br><br> Weisberg, cMedical Expenses and the Massachusetts Automobile Tort Reform Law: A First Review of 1989 Bodily Injury Liability Claims, d Journal of Insurance Regulation 10, no. 4 (Summer 1992): 512. 12 Insurance Research Council, Automobile Injury Claims in Hawaii (Oak Brook, IL: Insurance Research Council, 1991), 26.<br><br> 13 Stephen Carroll, Allan Abrahamse, and Mary Vaiana, The Costs of Excess Medical Claims for Automobile Personal Injuries (Santa Monica, CA: RAND, 1995), 23. 14 Stephen J. Carroll, James S.<br><br> Kakalik, Nicholas M. Pace, and John L. Adams, No-Fault Approaches to Compensating People Injured in Automobile Accidents (Santa Monica, CA: RAND, 1991), 187.<br><br> 15 Andrew Tobias, cRalph Nader is a Big Fat Idiot, d Worth (October 1996), 102. Figure 2. Compensation of Economic Loss under the Tort System 250% 56% 9% 0% 50% 100% 150% 200% 250% 300% $500 to $1,000 $25,000 to $100,000 Over $100,000 Size of Economic Loss Compensation as a Percent of Economic Los Source: Carroll, et.<br><br> al. A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 5 goes to cover legitimate medical costs and wage loss (see Figure 3). 16 The pain and suffering awards associated with these claims net claimants an additional 16.9 percent of the premium dollar.<br><br> Payments made for fraudulent and excessive claims account for at least 12.6 percent of the premium. More than 28 percent of the BI premium dollar goes towards lawyers 9 fees (both plaintiffs and defendants). The remaining premium is consumed by state taxes and license fees (2.3 percent), commissions and costs associated with selling policies (15.2 percent), and other overhead expenses (10.1 percent).<br><br> Overall, the tort liability system spends close to $6 on other expenses for each $1 it covers in actual medical and wage loss resulting from auto accidents. Auto Choice Reform One reform that would help address these problems is Auto Choice, a proposal developed by Jeffrey O 9Connell of the University of Virginia School of Law, and Michael Horowitz of the Hudson Institute. 17 Auto Choice gives consumers the option of exiting the current third-party liability system in favor of a primarily first-party insurance system that costs less and provides quicker and more complete compensation for all economic losses.<br><br> 18 In effect, Auto Choice 16 The basic breakout of the BI premium is from the Insurance Information Institute (New York, NY: 4/30/97) This analysis uses RAND 9s lower bound estimate of excessive claiming behavior to identify the component of the BI premium attributable to fraudulent and excessive claiming. 17 The proposal is more fully described in Jeffrey O 9Connell, Stephen Carroll, Michael Horowitz, Allan Abrahamse, and Paul Jamieson, cThe Comparative Costs of Allowing Consumer Choice for Auto Insurance in All Fifty States, d Maryland Law Review , 55, no. 1 (1996): 160-222.<br><br> See also O 9Connell et al. (1995) and O 9Connell et al. (1993).<br><br> 18 Economic damages refer to direct measurable losses such as medical expenses, lost wages and income, and funeral costs. The term cpain and suffering d is loosely used to refer to all non-economic damages, including physical and emotional pain, stress, and other psychic damages. Figure 3.<br><br> Distribution of Bodily Injury Premiums Medical bills & lost wages 14.5% Attorneys fees (plaintiff & defense) 28.4% Pain & suffering related to actual economic loss 16.9% Fraudulent & excessive claims 12.6% Commissions & selling expenses 15.2% State taxes & fees 2.3% Other overhead expenses 10.1% Source: Joint Economic Committee calculations and Insurance Information Institute data. P AGE 6 J OINT E CONOMIC C OMMITTEE would make insurance coverage for pain and suffering optional. Drivers who wish to remain with their state 9s current insurance system could do so at essentially no extra cost.<br><br> 19 Individuals who want to exit the liability system 9s pain and suffering regime would do so by purchasing Personal Protection Insurance (PPI). Rather than suing other drivers or their insurance companies, drivers who elect PPI would automatically be compensated for all economic losses up to policy limits by their own insurance company, without regard to fault. 20 PPI drivers retain the right to sue under existing state negligence laws for economic losses above policy limits.<br><br> Since PPI provides insurance coverage for economic damages only, PPI drivers could neither sue nor be sued for non-economic losses, with the important exceptions of injuries inflicted intentionally or as the result of drug or alcohol use. Alternatively, individuals could opt to retain the same basic rights they now have under existing state law by purchasing tort maintenance coverage (TMC) to cover accidents involving PPI drivers. Compensation for accidents involving drivers who stay with the current system would be unaffected by this reform.<br><br> For accidents involving PPI drivers, TMC policies allow recovery of both economic and non-economic losses, much as existing uninsured motorist (UM) policies currently provide first-party coverage for such accidents. Thus, the limit on recovery for pain and suffering losses caused by a PPI driver is chosen by the TMC driver. 21 If economic losses exceed TMC policy limits, TMC drivers can sue negligent PPI drivers for all of the remaining economic loss.<br><br> 22 Auto Choice seeks to preserve the traditional state role in regulating auto insurance. First, state laws defining negligence and other legal concepts are left largely intact. Second, state insurance commissioners can block the reform if they determine that their state would not experience a specified minimum amount of savings in premiums for bodily injury liability.<br><br> Finally, and most importantly, the Auto Choice proposal allows states to repeal the federal reform altogether or to modify it to suit their state 9s needs. New Jersey Governor Christine Todd Whitman has called the federal Auto Choice legislation ca model of federalism in that federal law would represent the first word, rather than the last word, on the subject. d 23 II. I NSURANCE C OST F ACTORS IN U RBAN A REAS The most glaring problem with auto insurance in cities is that premiums are too high.<br><br> However, the fundamental reason that premiums are higher in cities is that the costs to provide insurance are also higher. A review of the empirical research on the subject of urban auto 19 See sources indicated in infra note 122. 20 Fault would no longer matter with respect to injury compensation only.<br><br> State-based rate regulations would continue to penalize negligent drivers with higher premiums. 21 Under the current tort system, the limit on pain and suffering recovery is often set by the negligent driver 9s insurance policy, or set at zero in the case of uninsured drivers. 22 The version of Auto Choice examined here requires PPI drivers to also purchase supplementary liability insurance to provide additional coverage for certain situations, such as injuries to pedestrians and excess economic losses.<br><br> 23 Christine Todd Whitman, Governor of New Jersey, Testimony to the Joint Economic Committee, Congress of the United States, 3/19/97. A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 7 insurance reveals five factors that are primarily responsible for higher liability insurance costs in inner cities: 24 " frequency of injury claims " average injury cost per insured vehicle " fraud and claims buildup " transaction costs and litigation " uninsured motorists This section of the paper reviews some of the existing empirical research on these factors. Not all urban areas are alike.<br><br> Some cities have greater problems than others do, even within the same state. Philadelphia, for example, has more serious problems with auto insurance than does Pittsburgh. Similarly, Los Angeles is worse off than San Diego.<br><br> There are also important territorial distinctions to keep in mind. For instance, one report may compare a city with the rest of the state, whereas another study will compare a city to the surrounding suburbs. Additionally, results may differ from study to study depending on the cities included, the time period examined, or the data used in the analysis.<br><br> Claiming Frequency, Injury Severity and Loss Costs The underlying cause of higher insurance costs in urban areas is the higher frequency of injury claims per accident. Even though car crashes in urban areas are generally less severe (because they occur at a lower rate of speed), accidents in urban areas are more likely to result in an injury claim being filed with an insurance company. As a result, the average loss per insured vehicle (or average loss cost) is also higher.<br><br> To illustrate the magnitude of such differences in claiming behavior, Table 1 presents data for 10 cities and states on the number of bodily injury claims per 100 accidents (measured here as the number of property damage claims). In the state of California (excluding Los Angeles), there are close to 45 claims of bodily injury for every 100 accidents. In Los Angeles, the claimed injury rate is more than double the rest of the state: for every 100 property damage claims, there are approximately 99 bodily injury claims.<br><br> In Philadelphia, the claimed injury rate is three and one-half times the average for the rest of the state 3 more than 78 injury claims per 100 accidents. 24 Property damage and auto thefts are also much higher in cities but are not considered here because they would not be affected by the Auto Choice reform. P AGE 8 J OINT E CONOMIC C OMMITTEE Because each city listed in Table 1 and Table 2 is unique in terms of its state 9s legal and insurance system, population and vehicle density, overall crime rates, and geographic size, it is sometimes difficult to estimate precise relationships that hold for all cities.<br><br> Nonetheless, a review of the empirical research reveals a consistent pattern: claiming frequency and insurance costs are higher in cities than they are in other parts of the same state, even though injury severity tends to be the same or lower. 25 Survey of 49 Cities To supplement and build on the existing research, this paper examined insurance data for 49 cities in the United States. The results of this analysis, presented in Table 2, confirm the findings of earlier research.<br><br> Figures for each city represent the percentage difference between the city territory and the rest of the state for that indicator. The two primary types of coverage considered here are bodily injury (BI) liability and personal injury protection (PIP) policies. 26 Figures were calculated based on territorial definitions and 1989-1991 claims data published by the Insurance Research Council (IRC).<br><br> 27 25 See sources listed at infra notes 35, 59, 104, and Highway Loss Data Institute, Atlas of Automobile Injury and Collision Losses In Large Metropolitan Areas (Arlington, VA: Highway Loss Data Institute, 1995). 26 According to data from the National Association of Independent Insurers, these two coverages accounted for 80 percent of all personal injury auto insurance payments in 1994. 27 Insurance Research Council, Trends in Auto Injury Claims , 2 nd ed.<br><br> (Wheaton, IL: Insurance Research Council, 1995), Appendix B; and unpublished data from the Insurance Research Council. Criteria for city selection include 1992 population of at least 50,000; a population density of at least 1,000 persons per square mile; and an IRC territorial definition that approximates the city being compared. Territorial definitions do not always match official city limits.<br><br> For example, figures for Birmingham are actually for Jefferson County. Table 1. Number of Bodily Injury Claims per 100 Property Damage Claims Bodily Injury Claims per 100 Property Damage Claims City and State City Rest of State Ratio Los Angeles, CA 98.8 44.5 2.22 Newark, NJ 79.6 32.8 2.42 Philadelphia, PA 78.5 22.4 3.50 Baltimore, MD 62.1 36.6 1.69 Charlotte, NC 58.1 41.8 1.39 Milwaukee, WI 43.9 29.4 1.49 Cleveland, OH 40.8 28.5 1.43 Memphis, TN 35.7 25.3 1.41 Miami, FL 29.4 18.2 1.62 New York, NY 27.6 10.3 2.67 Source: Joint Economic Committee calculations and Insurance Research Council, Trends in Auto Injury Claims .<br><br> A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 9 Table 2. Differences in Claiming Behavior between Cities and the Rest of the State Bodily Injury (BI) Personal Injury Protection (PIP) State City Frequency Severity Average Loss Cost BI-to-PD Ratio Frequency Severity Average Loss Cost AL Birmingham +10% 0% +9% -6% AZ Phoenix +34% -8% +24% +15% AR Little Rock +55% -7% +44% +16% CA Los Angeles +144% -22% +90% +122% CO Denver +35% -13% +19% +9% +31% +3% +35% CT Hartford +161% -28% +88% +23% +171% -7% +151% DE Wilmington +59% -11% +41% +12% +74% -10% +56% DC DC Suburbs +39% +6% +47% +22% FL Miami +83% -32% +24% +62% +2% +25% +27% GA Atlanta +52% -14% +31% +21% +47% +10% +61% HI Honolulu +61% -29% +16% +17% +31% -24% -1% ID Boise +21% -11% +8% +4% IL Chicago +53% -20% +23% +32% IN Indianapolis +32% -3% +27% +13% IA Des Moines +51% -2% +49% +9% KS Wichita +10% -4% +6% -14% +18% -3% +15% KY Louisville +20% -8% +10% -5% +9% -6% +2% LA New Orleans +49% +4% +55% +34% ME Portland +29% -8% +18% -2% MD Baltimore +121% -6% +106% +69% +140% +14% +173% MA Boston +93% +10% +112% +28% +97% +16% +129% MI Detroit +27% -18% +6% NA +23% -45% -33% MN Minneapolis +63% -3% +59% +27% +24% +15% +43% MS Jackson -9% -16% -24% -13% MO Kansas City +34% -16% +13% +15% MT Billings +85% -13% +62% +21% NE Omaha +100% -21% +58% +36% NV Las Vegas +47% +7% +57% +19% NH Manchester +50% 0% +49% +7% NJ Newark +244% -18% +182% +142% +119% +13% +148% NM Albuquerque +43% -3% +39% +14% NY New York City +234% -29% +140% +167% +37% +36% +86% NC Charlotte +111% -18% + 7 4 % +39% ND Fargo +51% +15% +72% -1% +52% +3% +56% OH Cleveland +40% +4% +46% +43% OK Tulsa +34% +10% +47% +2% OR Portland +53% -4% +46% +14% +68% -19% +37% PA Philadelphia +226% -13% +184% +250% RI Providence +48% -13% +28% +33% SC Charleston +50% -7% +40% +1% SD Sioux Falls +73% -25% +30% +19% TN Memphis +66% -25% +24% +41% TX Houston +42% +3% +46% +21% +41% +14% +60% P AGE 10 J OINT E CONOMIC C OMMITTEE Table 2. Differences in Claiming Behavior between Cities and the Rest of the State, cont.<br><br> Bodily Injury (BI) Personal Injury Protection (PIP) State City Frequency Severity Average Loss Cost BI-to-PD Ratio Frequency Severity Average Loss Cost UT Salt Lake City +40% -2% +36% +11% +30% +2% +33% VA Norfolk & Area +47% -17% +23% +23% WA Seattle +18% +8% +28% -10% -3% +17% +13% WV Charleston +3% -6% -3% -8% WI Milwaukee +95% -16% +64% +49% Average All states +65% -9% +47% +31% +53% +3% +57% Tort states +57% -8% +43% +28% No-fault states Strict Verbal +20% +5% +27% Dollar/Weak Verbal +57% +2% +61% Source: Joint Economic Committee calculations and Insurance Research Council, Trends in Auto Injury Claims . This analysis examines three types of insurance systems: traditional tort, no-fault with a dollar or weak verbal threshold, and no-fault with a strict verbal threshold. Under traditional tort systems, there are no restrictions on the right to sue, and accident victims recover damages primarily from the negligent driver 9s liability policy.<br><br> 28 No-fault systems with a dollar or weak verbal threshold allow lawsuits only when a certain amount of medical bills have accumulated (dollar threshold) or when the injuries meet broad descriptive criteria (weak verbal threshold). Drivers in no-fault states with a strict verbal threshold can bring a lawsuit only in cases where the injuries meet specific descriptive criteria (strict verbal threshold). 29 Averages for the primary coverage (BI in tort states and PIP in no-fault states) in each system are presented at the end of Table 2.<br><br> For the 49 cities examined here, the average BI claim frequency was 65 percent higher than the rest of the state. The pattern for PIP claims was similar, with cities averaging 53 percent more claims per 100 insured cars. Unadjusted BI claiming rates, however, are not perfect indicators of claiming behavior, since urban areas tend to have more accidents.<br><br> As noted in Table 1 above, an alternative measure of claiming rates is the ratio of BI claims to property damage (PD) claims (called the BI-to-PD ratio), in which the number of PD claims serves as a proxy for the number of accidents. As might be expected, when the different accident rate is accounted for, the discrepancy in claiming frequency between cities and other areas is reduced. Nonetheless, the difference in BI claiming frequencies is startlingly higher 3 31 percent higher on average (see the bottom of column 4 in Table 2).<br><br> 28 In this analysis, tort states include both traditional tort states and cadd-on d tort states. First-party health insurance coverage for auto injuries is available through medical payments (MP) policies in traditional tort states and through personal injury protection (PIP) policies in cadd-on d tort states. 29 Although Florida is listed here as having a strict verbal threshold, its descriptive criteria are considerably broader than those in Michigan and New York.<br><br> Even in Michigan, which has the strictest verbal threshold in the country, increasing numbers of cases are being judged eligible for litigation. A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 11 Although injury claims are more frequent in cities, the injuries caused by auto accidents tend to be less severe. The fatality rate for accidents on urban roads is less than half that for rural roads.<br><br> 30 Even among crashes with at least one fatality, urban accidents are generally less severe, with 42 percent of survivors reporting no injury compared to 28 percent for rural accidents. Conversely, 25 percent of survivors of fatal accidents in urban areas suffer an incapacitating injury, versus 37 percent for rural accidents. 31 Reflecting these facts, the average BI claim in cities was 9 percent smaller than elsewhere in the same state, while PIP claims were just 3 percent larger.<br><br> 32 The final point of comparison, average loss cost, is perhaps the most important in determining the actual premium charged by insurance companies. Average loss cost is simply the total amount of injury payments made by insurers divided by the number of insured cars. It is, in other words, each policyholder 9s share of the direct cost of paying injury claims, not counting expenses such as administrative, personnel, or legal defense costs.<br><br> The average loss cost, or pure premium, is the base from which total premiums are determined. 33 Any effort to reduce premiums must, ultimately, reduce average loss costs. As with claiming rates, the data in Table 2 indicate that loss costs in cities are substantially higher than elsewhere in the state.<br><br> The average cost per insured driver to pay bodily injury claims is 47 percent higher in cities compared to other parts of the state. For PIP claims, the figure is 57 percent. It is worth noting, however, that for the three states with strict verbal thresholds (Florida, Michigan and New York), the city-suburb disparity in average PIP loss costs is just 27 percent, less than one-half the 61 percent average for the other no-fault states.<br><br> 34 Michigan, with the toughest verbal threshold in the country, is the only no-fault state where the average loss cost of PIP claims is significantly lower in the city than elsewhere. Since average loss cost represents the base used to determine overall premiums, these figures can be interpreted as a rough measure of the differences in BI and PIP premiums paid by residents of the different territories. 35 One remarkable observation that comes from the data in Table 2 is that auto insurance problems are not just limited to major metropolises like Philadelphia and Los Angeles.<br><br> Even cities such as Billings, Montana, and Charlotte, North Carolina, have average loss costs that 30 These data also indicate that there is only a negligible difference in the number of people injured or killed per accident. U.S. Department of Transportation, Federal Highway Administration, Highway Statistics 1995 (Washington, DC: Government Printing Office, 1996), V-104.<br><br> 31 U.S. Department of Transportation, National Highway Traffic Safety Administration, Rural and Urban Crashes: A Comparative Analysis , DOT HS 808-450 (Washington, DC: National Highway Traffic Safety Administration, 1996), 75. 32 Injury severity is measured here as the size of the injury claim.<br><br> Claim size, however, is an imperfect measure of the actual damage because the size of the claim is often a function of tort incentives presented to the claimant. See supra notes 11, 12, and 13, and accompanying text. 33 See S.S.<br><br> Huebner, Kenneth Black, Jr., and Bernard L. Webb, Property and Liability Insurance , 4 th ed. (Upper Saddle River, NJ: Prentice Hall, 1996), 623-628.<br><br> 34 For further discussion, see text accompanying infra note 133. 35 This interpretation assumes that the markup from pure premium is uniform within a state. Although this generally appears to be the case (as indicated in Lamberty), the correlation between loss costs and premiums is weakened to the degree that state insurance regulations limit the use of location as a determinant of premiums.<br><br> Steve Lamberty, cUrban and Non-Urban Auto Insurance Comparisons, d NAIC Research Quarterly 1, no. 4 (October 1995): 17. P AGE 12 J OINT E CONOMIC C OMMITTEE exceed 60 percent of the average for the rest of the state.<br><br> Bigger cities, in other words, are frequently the most expensive areas for insurance, even within otherwise clow cost d states. These figures underscore the importance of auto insurance reform for all urban centers. Fraud and Claims Buildup Another factor that increases the cost of auto insurance in cities is fraud and other abuse of the insurance system.<br><br> The available data indicate that fraud and abuse are more common in large urban areas. The insurance system suffers from two types of abuse. The first type involves explicit fraud, including staged accidents, orchestrated visits to doctors 9 offices, and organized crime.<br><br> The second type includes opportunistic claims buildup that results when individuals inflate their insurance claims for injuries that either are not real, are less severe than claimed, or are not even related to the auto accident in question. The most comprehensive study of fraud by accident location is the 1996 report Fraud and Buildup in Auto Injury Claims by the Insurance Research Council (IRC). 36 The report examined over 15,000 actual insurance claims from 1992, each of which had notes from claims adjusters identifying elements that suggested the presence of fraud and buildup.<br><br> The IRC study included data for nine major cities (population of at least one million) and their surrounding suburbs, as well as other large central cities (population 100,000 to one million) and their suburbs, medium cities, and small town/rural cities. Figure 4 presents the percent of cases in each location where there was a high degree of suspicion of fraud and buildup. A similar pattern is evident for both types of abuse: the greater the degree of urbanization, the more likely an injury claim will be fraudulent or include buildup.<br><br> In major cities, for example, 14 percent of claims had a high 36 Insurance Research Council, Fraud and Buildup in Auto Injury Claims (Wheaton, IL: Insurance Research Council, 1996). Figure 4. Claims with a High Degree of Suspicion of Fraud or Buildup 3% 6% 7% 8% 10% 14% 8% 14% 14% 17% 21% 26% 0% 5% 10% 15% 20% 25% 30% Small Town/Rural Medium City Central City Suburb Central City Major City Suburb Major City Fraud Buildup Source: Insurance Research Council, Fraud and Buildup .<br><br> A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 13 degree of suspicion of fraud, and 26 percent had a high degree of suspicion of buildup. Rates for all other areas were progressively lower. A more indirect indicator of fraud and buildup is the frequency of soft tissue injuries.<br><br> Soft tissue injuries, such as sprains or strains, are real injuries, but because there is no way to medically verify their existence, they make ideal candidates for fraud and buildup. Figure 5 presents data on the distribution of injury types by accident location. In rural accidents, 40 percent of injury claims involve only sprains or strains.<br><br> By comparison, nearly two-thirds (64 percent) of injury claims in central cities are non- verifiable. 37 As noted above, the different forms of fraud and other abuse vary widely, ranging from opportunistic claims buildup committed by individuals to multi-million dollar fraud rings orchestrated by organized crime. Organized fraud and criminal rings are more common in inner cities.<br><br> Dense urban centers generally have all the elements necessary for such crime rings to prosper: frequent accidents that can result in easily-faked injuries; an abundance of professionals capable of taking advantage of the system; and a supply of often needy, low-income individuals who may be enticed into breaking the law. One common type of fraud is cghost riders, d individuals who file insurance claims for accidents that either did not happen or did not involve them. In a 1993 New Jersey investigation of ghost riders, police staged a low-speed accident with a city bus, and 17 people climbed onto the bus after the accident and later filed insurance claims for their cinjuries. d 38 In a separate case, a bus driver witnessed an accident between two other vehicles and stopped to see if anyone 37 Insurance Research Council, Auto Injuries: Claiming Behavior and Its Impact on Insurance Costs (Oak Brook, IL: Insurance Research Council, 1994), 20.<br><br> 38 The New York Times , 8/18/93. Figure 5. Types of Bodily Injury Claims by City Size 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Rural Small Town Medium City Suburbs Central City 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Sprain or Strain Plus Non-Sprain/Strain Sprain or Strain Only Non-Sprain/Strain Only Source: Insurance Research Council, Claiming Behavior .<br><br> P AGE 14 J OINT E CONOMIC C OMMITTEE needed help. Having heard the sound of a crash and seeing the bus driver get off the bus, 27 of the bus passengers assumed that their bus had crashed and filed insurance claims. 39 Another type of abuse comes in the form of schemes that coordinate staged accidents, visits to doctors 9 offices, legal representation, and insurance claims.<br><br> For example, a Boston chiropractor who was convicted of insurance fraud required that all patients to his clinics make at least 25 visits and receive at least $2,000 worth of medical treatments. 40 Another common technique is for fraud rings to utilize crunners d who use radio scanners to arrive at accident scenes ahead of police or emergency personnel, and then encourage individuals to file claims for non-existent injuries. Other schemes involve lawyers and doctors who work in conjunction with each other to inflate the size of bills charged to the insurance company.<br><br> It is not uncommon for organized crime be involved. Federal law enforcement agents recently disrupted such a ring run by the Russian Mafia in Louisiana, Texas, Florida, Oregon, and California. 41 Another ring based in Pittsburgh has also been linked to Russian organized crime.<br><br> 42 Organized fraud rings frequently file claims based on staged accidents. In such cases, two or more cars are loaded up with passengers and then caccidentally d collide. Participants are then paid a fixed amount, such as $50 or $100 per accident, to file false injury claims.<br><br> Innocent drivers are frequently unwitting participants. A common technique is the cswoop and squat, d where one car pulls in front of a truck or other vehicle that appears well insured. A second car then cswoops d in front the first car and slams on the breaks, giving the first car a plausible excuse to do likewise, thus causing the unknowing driver to collide into the schemer from behind.<br><br> Investigators often note that ethnic groups are targeted to serve as cstuffers, d the persons who ride in the cars and cause the accidents. In southern California and Texas, for instance, low- income Hispanic immigrants are routinely used as the cvictims d in staged accidents. Other staged-accident rings have involved African-American, Filipino, Armenian and Korean groups in Los Angeles; Vietnamese in Orange County, California; Russian-Jews and Eastern Europeans in Pittsburgh and New York; and Haitians and Jamaicans in Florida.<br><br> 43 Although the injuries that stuffers are instructed to claim are supposed to be fake, staged accidents have resulted in death or serious injury to stuffers and innocent drivers alike. 44 Ironically, these low-income stuffers are paid as little as $50 or $100 to risk their lives, even as the lawyers and doctors involved can bring in tens of thousands of dollars per accident. 45 39 Ibid .<br><br> 40 The Boston Globe , 4/19/95. Not coincidentally, Massachusetts 9s law requires that injury claimants have at least $2,000 in medical bills before they can sue for pain and suffering. 41 U.P.I ., 8/1/97.<br><br> 42 The Pittsburgh Post-Gazette , 1/4/97. 43 The San Francisco Chronicle , 10/31/93; The Los Angeles Times , 7/13/92; and The Pittsburgh Post-Gazette , 3/12/97. 44 The Los Angeles Times , 7/13/92.<br><br> 45 For a comprehensive account of the long history of abuses by claimants and organized fraud rings, see Ken Dornstein, Accidentally, on Purpose: The Making of a Personal Injury Underworld in America (New York, NY: St. Martin 9s Press, 1996). A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 15 The problems of fraud and abuse of the insurance system are of real concern to low-income, inner-city residents.<br><br> Indeed, such persons suffer from both ends of the system. Not only do they have to pay high premiums because they live in high-cost territories, but they also are targets of organized crime rings that try to lure them into staged accident schemes. As Sean Mooney of the Insurance Information Institute put it: Residents of inner cities suffer from a number of social ills 3 low income, poor education, and reduced employment opportunities.<br><br> In addition, inner-city residents are prey to drug dealers, thieves, and other criminals. It is now increasingly apparent that inner-city residents are also the prey of a newer parasite 3 the profiteers of hard-core insurance fraud. These profiteers recruit inner-city residents as their pawns in multi-million dollar insurance fraud rings.<br><br> To some extent insurance companies pay for these claims out of profits. But the real victims are the inner city residents themselves who pay for the costs of insurance fraud and abuse through higher insurance premiums. 46 Another detrimental consequence of greater fraud in inner cities is the potential for slower payment for real injuries.<br><br> Fraud prevention efforts necessarily require that insurance companies investigate injury claims that appear to have elements of fraud or buildup before the claims are paid. Since inner-city injury claims are more likely to exhibit signs of fraud or buildup, payments to claimants for legitimate injuries can be delayed while insurance companies investigate suspicious cases. The magnitude of the organized fraud schemes is often quite large.<br><br> A fraud ring in south- central Los Angeles, for example, bilked insurers out of more than $20 million in medical and legal bills. 47 In Passaic County, New Jersey, hundreds of individuals have been charged with manufacturing over $75 million in bogus claims. 48 A chain of clinics run by two chiropractors in northern New Jersey has been charged with filing $52 million in bogus insurance claims.<br><br> 49 Consumers ultimately bear the cost of fraud and claims buildup through higher premiums. According to FBI Director Louis Freeh, cEvery American household is burdened with over $200 annually in additional premiums to make up for this type of [insurance] fraud. d 50 As previously noted, research by the RAND Institute for Civil Justice indicates that between 35 and 42 percent of injury claims occur as a result of the incentives of the tort system, totaling between $13 and $18 billion in higher premiums in 1993. 51 46 Sean F.<br><br> Mooney, cThe Cost of Urban Auto Insurance d (New York, NY: Insurance Information Institute, 1992), 22. 47 California Department of Insurance, Fraud Division, The Investigator (Spring 1996). 48 Business Week , 6/30/97; and The (Bergen, N.J.) Record , 6/11/97.<br><br> 49 The New York Times , 4/22/97. 50 U.S. Department of Justice, Federal Bureau of Investigation, Press Release (Washington, DC: Federal Bureau of Investigation, 5/24/95).<br><br> 51 Carroll, Abrahamse, and Vaiana, 23. P AGE 16 J OINT E CONOMIC C OMMITTEE Transaction Costs and Litigation As in any industry, consumers suffer when transaction costs are too high. In the case of auto insurance, one of the biggest transaction costs is legal expenses.<br><br> Clearly, lawyers play an important and necessary role in obtaining compensation for injured drivers in today 9s system. However, in many cases pain and suffering damages are awarded not to compensate the injured victims, but to pay for legal costs. According to Wolfram, cinflated elements of general damages, such as pain and suffering, are tolerated by courts as a rough measure of the plaintiff 9s attorney fees. d 52 Quite simply, attorney services are expensive, and consequently, high lawyer involvement can increase the cost of providing auto insurance.<br><br> For personal injury lawsuits, the plaintiff 9s attorney generally takes 33 to 40 percent of the final award, regardless of how much time and effort are required to win the case. According to one study, attorney representation is associated with a 64 percent increase in the size of the insurance claim, even after controlling for environmental variables and injury type. 53 Defense attorneys are also highly paid (though on an hourly basis) and often seek to drag cases out as long as possible, hoping to force the plaintiff to accept a smaller award as well as to increase their own fees.<br><br> The available data indicate that attorney involvement is significantly higher in large cities relative to suburbs (Table 3). In both Baltimore and Los Angeles, approximately nine out of every 10 bodily injury claimants hired an attorney in 1992. 54 While attorney representation in 52 Wolfram, 528 at note 21.<br><br> 53 Mark J. Browne and Robert Puelz, cStatutory Rules, Attorney Involvement, and Automobile Liability Claims, d Journal of Risk and Insurance 63, no. 1 (March 1996): 79.<br><br> 54 Insurance Research Council, Claiming Behavior , 48. Table 3. Attorney Representation for BI and PIP Claims in Selected Cities BI Claims PIP Claims City Suburb Ratio City Suburb Ratio Baltimore 89% 78% 1.14 80% 68% 1.18 Los Angeles 92% 78% 1.18 NA NA NA Houston 72% 49% 1.47 52% 42% 1.24 Washington, D.C.<br><br> 76% 63% 1.21 56% 50% 1.12 San Francisco 70% 55% 1.27 NA NA NA Chicago 61% 47% 1.30 NA NA NA Dallas/Ft. Worth 53% 48% 1.10 47% 27% 1.74 Seattle 51% 39% 1.31 23% 29% 0.79 Phoenix 50% 38% 1.32 NA NA NA Philadelphia NA NA NA 77% 56% 1.38 New York NA NA NA 64% 40% 1.60 Detroit NA NA NA 36% 16% 2.25 Average 68% 55% 1.24 54% 41% 1.33 Source: Insurance Research Council, Claiming Behavior . A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 17 the suburbs of these cities was still high (78 percent), it was nonetheless significantly lower than the rate in the central city.<br><br> The city-suburb differential was even greater in other cities. The attorney representation rate for PIP claimants in New York City, for example, was 60 percent higher than in the suburbs, and PIP claimants in Dallas/Ft. Worth were 74 percent more likely to hire an attorney than claimants in the suburbs.<br><br> The average rate of attorney representation in these selected cities relative to their suburbs was 24 percent higher for BI claimants and 33 percent higher for PIP claimants. If the tort liability system were successful at compensating individuals, then the higher cost might be worth paying. The available data, however, suggest that having an attorney does not improve the speed of compensation for injured victims.<br><br> For example, among small bodily injury claims ($500 or less), just 9 percent of claimants with an attorney received their final payment from the insurance company within 30 days, compared to 63 percent for non-represented claimants. For more serious injuries (over $2,500), three times as many attorney-represented claimants (45 percent) had to wait over a year for final payment compared to non-represented claimants (15 percent). 55 Moreover, as previously indicated, the system performs badly with respect to the amount of compensation.<br><br> A 1991 study by the RAND Institute for Civil Justice found that accident victims with less than $5,000 in economic losses receive compensation that is on average worth two to three times the amount of their losses. 56 The seriously injured, such as those with permanent or total disability, do not fare nearly as well. Such victims are often denied full recovery for their economic losses, and what they do receive can be delayed for years.<br><br> According to RAND, persons with economic losses of $25,000 to $100,000 are compensated for just over one-half (56 percent) of their losses on average. The very seriously injured (economic losses over $100,000) receive compensation worth just 9 percent of their damages. 57 Uninsured Drivers A major problem that contributes to higher premiums in urban areas is the number of uninsured motorists.<br><br> All states require drivers to carry a minimum amount of liability insurance or to meet certain financial responsibility levels. Nonetheless, uninsured motorists are a widespread and costly problem in urban areas, where the concentration of low-income households places many families in the difficult position of choosing between purchasing basic necessities or complying with the law. As City Councilman Mark Ridley, who represents South Central Los Angeles, put it: cIt 9s a function of putting food on the table versus paying for car insurance.<br><br> It 9s really obvious what one does. d 58 55 Ibid ., 72. 56 Carroll, Kakalik, Pace, and Adams, 187. 57 In many cases, the seriously injured are undercompensated even though they receive maximum compensation from the applicable insurance policy.<br><br> That amount, however, is often capped at the limits chosen by those who injure them. 58 The Los Angeles Times , 3/2/95. P AGE 18 J OINT E CONOMIC C OMMITTEE The problem of uninsured motorists is particularly severe in inner cities.<br><br> According to one survey of 17 large cities, the average rate of uninsured motorist (UM) claims (per 100 property damage claims) is over three times higher in cities than in other areas of the same states. 59 Other insurance claims data also indicate that uninsured motorists are more frequent in central cities. As can be seen in Figure 6, 44 percent of all uninsured motorist claims resulted from accidents that took place in central cities, even though such accidents accounted for just 36 percent of all bodily injury (BI) claims.<br><br> 60 The problem of uninsured motorists is well documented in California. A 1995 zip code level survey by the California Department of Insurance found that 28 percent of drivers in that state were uninsured, totaling roughly 5.8 million vehicles statewide. 61 In Los Angeles County, the figure was 37 percent, and in San Francisco it was nearly 33 percent.<br><br> Certain zip codes had exceptionally high-uninsured motorist rates. Some areas of Oakland and south central Los Angeles, for instance, had an uninsured motorist rate over 60 percent, while other zip codes in Los Angeles and San Diego had rates in excess of 90 percent. The consequences of high rates of uninsured motorists are significant.<br><br> The California study revealed that the state 9s insured drivers pay more than $1 billion a year in added premiums to protect themselves from uninsured motorists. 62 The overall premium effect of uninsured motorists, however, is significantly greater than just the cost of UM policies. As Eric Smith and Randall Wright explain in their 1992 American Economic Review article, calthough the entire [insurance] package may be actuarially fair, the individual components are not. d 63 In other 59 Insurance Services Office, Inc.<br><br> and National Association of Independent Insurers, cFactors Affecting Urban Auto Insurance Costs d (New York, NY: Insurance Services Office, Inc., 1988), 15. 60 Insurance Research Council, Claiming Behavior , 14. 61 The Los Angeles Times , 3/2/95; The San Francisco Chronicle , 3/2/95; and The San Diego Union-Tribune , 3/3/95.<br><br> 62 The San Francisco Chronicle , 3/2/95. 63 Eric Smith and Randall Wright, cWhy Is Automobile Insurance in Philadelphia So Damn Expensive? d American Economic Review 82, no. 4 (September 1992): 759 at note 5.<br><br> Figure 6. Accident Location of Injury Claims 6% 9% 22% 27% 36% 4% 6% 24% 22% 44% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Rural Small Town Suburb Medium City Central City Percent of Total Bodily Injury claims Uninsured Motorist claims Source: Insurance Research Council, Claiming Behavior . A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 19 words, insurance policies other than UM may end up paying for damages caused by uninsured motorists.<br><br> For example, first-party health coverage through medical payments (MP) or personal insurance protection (PIP) policies may foot the bill for injuries caused by negligent uninsured drivers. 64 Such costs are ultimately passed on to the consumer in the form of higher MP or PIP premiums. According to the California Department of Insurance, other non-UM premium costs caused by uninsured motorists create an additional $1 billion burden to that state 9s consumers.<br><br> 65 Unfortunately, the problem of uninsured motorists is one that feeds upon itself. Inner- city drivers pay high insurance premiums because there are so many uninsured drivers. At the same time, however, the very reason there are so many uninsured drivers is that premiums are high.<br><br> This correlation between uninsured motorists and premiums is apparent in research by Smith and Wright, who present uninsured motorist data for seven cities and their surrounding suburbs, plus four sample premiums for each territory. 66 When calculated as differentials between city and suburb, there are four points of comparison for each city, yielding a total of 28 data points (Figure 7). With these data, it is possible to compare the change in premiums with the change in uninsured motorists.<br><br> As the trend line indicates, the greater the increase in uninsured motorists, the greater the increase in premiums. This pattern helps to confirm the contention that premium reductions would be effective in reducing the number of uninsured drivers. 64 The same principle holds for property damage as well.<br><br> 65 The Sacramento Bee , 3/19/95. 66 Smith and Wright, 757. Figure 7.<br><br> Correlation between Uninsured Motorists and Premiums 0% 20% 40% 60% 80% 100% 120% -20% 0% 20% 40% 60% 80% 100% Increase in Uninsured Motorist Rate Increase in Premiums Trend Line Source: Joint Economic Committee calculations and Smith and Wright data. P AGE 20 J OINT E CONOMIC C OMMITTEE III. C ONSEQUENCES OF H IGHER I NSURANCE C OSTS FOR U RBAN A REAS A number of adverse outcomes result from all of the problems that increase insurance costs in urban areas.<br><br> First, by reducing the transportation options available to low-income workers, high urban premiums can reduce labor market efficiency and depress wages for low-skilled, inner-city residents. Second, there is the burden on taxpayers in the form of higher government expenses and lower tax receipts. Third, distrust towards the auto insurance system eventually can lead to a more generalized lack of respect for the law.<br><br> Finally, large premium disparities arise between cities and suburbs. Such disparities underscore the higher cost of living in many cities and encourage middle-class families to move to the suburbs. Each of these outcomes is explored in greater detail below.<br><br> Inner-City Jobs An important consequence of excessively high premiums for low-income urban residents is the lack of job access and job mobility. It is often noted that the cgood d jobs are located in the suburbs of large cities. 67 In fact, there is evidence that suburban jobs pay more than inner-city jobs, even for the same type and skill level of work.<br><br> For example, a 1989 survey of fast food restaurants in Atlanta found that the average entry-level wage was $3.79 in restaurants closest to the city 9s center, compared to an average $4.61 for restaurants farthest out, a 22 percent difference. 68 A related concern is the exodus of entry-level jobs from central cities, a trend evident in the finding of one study that by 1990 employment in suburban areas was actually greater than central-city employment in virtually all industrial sectors. In the manufacturing and retail trade sectors, which employ large numbers of low-skill workers, roughly 70 percent of jobs were located in suburban areas by 1990.<br><br> 69 A number of different explanations have been offered to explain this disparity, one of which is the spatial mismatch hypothesis. The central component of the spatial mismatch hypothesis is that there is a relative shortage of low-skill labor in suburbs, while inner cities have a surplus of such labor. Residents of suburbs tend to have greater amounts of education and training, and as a result there are fewer suburban residents to fill the demand for low-skill jobs.<br><br> In order to attract workers to such positions, the market pushes up the average wage for such jobs. Inner cities, in contrast, face the opposite problem: there is a surplus of low-skill labor for local jobs, which exerts downward pressure on wages. Access to the better-paying suburban jobs is limited for inner-city residents because of their higher travel costs, which either make finding a job more difficult or discourage inner-city residents from seeking suburban employment altogether.<br><br> 67 For example, see Jane Gross, cPoor Without Cars Find Trek to Work Is Now a Job, d New York Times , 11/18/97; Lorraine Woellert, cD.C. Students 8Go Where the Money Is 9; Turn to Suburbs for Summer Jobs, d The Washington Times , 6/24/95; and William Julius Wilson, When Work Disappears (New York: Vintage Books, 1996), 39-42. 68 Keith R.<br><br> Ihlanfeldt and Madelyn V. Young, cThe Spatial Distribution of Black Employment Between the Central City and the Suburbs, d Economic Inquiry 34, no. 4 (October 1996): 693-707.<br><br> 69 John D. Kasarda, cIndustrial Restructuring and the Changing Location of Jobs, d in State of the Union: America in the 1990s. Volume I: Economic Trends , ed.<br><br> Reynolds Farley (New York, NY: Russell Sage Foundation, 1995), 235, 262. A UTO C HOICE : I MPACT ON C ITIES AND THE P OOR P AGE 21 This problem first became apparent in the aftermath of the 1965 Watts riots in Los Angeles. California Governor Edmund Brown appointed the McCone Commission to investigate the factors that led up to the outbreak of violence.<br><br> The Commission identified inner-city employment as the cmost serious immediate problem d and reported that transportation obstacles were an important element of the jobs problem: Our investigation has brought into clear focus the fact that the inadequate and