The State of Texas passed a mandatory automobile liability insurance law in 1991. The stated purpose was to reduce thenumber of uninsured drivers on the road. While that may have occurred, there have been some other results that the legislators probably did not contemplate. A few of these results are as follows:
Insurance companies filed for increased insurance premiums because they were now required to insure previously uninsured drivers. Failing to get the higher rates, many left the state or curtailed their underwriting efforts greatly.
The insurance contract is a contract of indemnity. That is, a contract to repay for what has been lost or damaged. By charging each participant only a small premium, the insurance industry spreads the risk over a large number of parties. In theory, for the payment of amodest portion of any potential individual loss, the insured can recover in full.
Increasingly, auto insurers are making contracts that sound more like they are saying "you are insured against loss as long as you never have a loss." But, if you have a loss they raise the premium to make you in essence a coinsurer. You end up paying for the loss with stiff increases in premiums. That violates the very core concept of "being insured."
It is insurance companies who are supposed to calculate the risks and charge enough for premiums to offset all potential losses. Suppose a life insurance company experienced a higher than expected death rate among policy holders and tried to prorate the survivor's benefits to make up for the insurers lack of foresight? There would be a revolt. Yet, casualty insurers continue to change the rules in midcourse. Witness the attempts to shortchange on settlements in the aftermath of Hurricane Andrew. And even refusing to write any further insurance in Florida. The risks are too high, they say. Now, we know the true meaning of "fair weather friends."
In recent years, we have seen insurance companies define their target markets as increasingly smaller niche's, e.g., only nonsmokers, only those with clean driving records, only those between the ages of 25 & 55 who take defensive driving courses every two years, etc. The result has been that the broad coverage concept has been effectively destroyed.
The overhead cost of insurance companies are out of hand. The auto repair system does not negotiate with manufacturers to purchase replacement parts on a volume basis. Fraud in repairs and claims is rampant. Large contingency fees are earned by lawyers suing insurance companies on behalf of clients. The insurance regulatory system that functions mostly as an extension of the insurance industry, is costly and provides the consumer few benefits. All this combines to make me wonder if the only real alternative is for everyone to become self-insured.
In October 1992, after 16 years of auto coverage with Aetna Casualty in the state of Texas, I discovered what it really means to deal with the insurance industry under mandatory automobile insurance laws. I received a notice from my insurance agent that Aetna would not renew my insurance as the agent was no longer authorized to write Aetna policies.
I immediately contacted my insurance agent. He indicated that he was leaving the insurance agency where he had been a partner for about seven years as it had lost its Aetna agency privileges. However, he was opening his own agency and would obtain insurance quotes in order that coverage would be maintained.
The state of Texas requires automobile liability insurance before you can obtain auto license tags, or a drivers license. In some cases, the state will allow you to prove financial responsibility by making application to the Department of Public Safety. However, if you are canceled for almost any reason, the result is that large insurance companies will insure you only if you have a spotless record. Otherwise, welcome to the high-risk pool.
In our case, we had three claims during 1989 for windshield damage to three different automobiles in a nine month period because of road construction on a major thoroughfare near our home. Despite the fact that we had carried comprehensive insurance coverage for 13 years with the carrier, the carrier in 1990 used that as a reason to increase our insurance premiums by approximately $700 per year over the next three years. Interesting to note that if I had not placed a claim under my comprehensive insurance policy, my out-of-pocket costs would have been only $950 and not the $2100 which my increased premiums cost me. Moreover, the claims would not have appeared on my record.
We also had been involved in two accidents in the past 42 months. In the first accident, the other driver clearly ran into our car as we were stopped at an intersection waiting to make a left turn and with our turn signals flashing. The other driver was talking to his wife on a cellular phone and came over the hill driving 30-40 miles above the speed limit on a road that was unfamiliar to him. His insurance paid for my $13,000 auto damage except that the accident was now on my record.The police gave the driver a ticket for reckless driving, driving without insurance, and speeding based upon the tire marks.
In the second accident, I was parked with a panel truck parked at the left side of my car. While backing out, and with myleft bumper protruding some 6" beyond the rear of the panel truck, I was involved in an accident. The other car was driven by a suspected convenience store robber. He was uninsured and driving a stolen car on the wrong side of the road while being chased by a police car. The police arrested the other car's driver but since I was going backward, the insurance company decided I was at fault.
I attempted to get the insurance company to deny the claim for damage to the stolen vehicle driven on the wrong side of the road by the convenience store robber. But, the insurance company paid to repair the stolen car and charged the $1,908.23 total cost of repairing both cars against my insurance policy. This added more points to my record.
High Risk High Premiums
After several weeks, the insurance agent called with some good news. He finally found an insurance company to issue me a policy after checking with 18 companies. However, the premium would be increased. In 1992, the premium had been $3,407 per year for the three automobiles. The new high risk pool premium was quoted at $4,977, or an increase of 43.2% over the previous year. After sticker shock was overcome, I wrote a check for the full premium. Two weeks later, the insurance company indicated that they had made a rating error and their revised premium was $5,701, an increaseof 67.3%.
After my blood pressure was under control, I asked the insurance agent to have the premium figures rechecked. Two weeks later, the insurance company decided that I was entitled to some additional discounts, i.e., defensive driving course,auto alarms on all vehicles, vehicles in locked garages, and multicar discounts bringing the new premium to $5,105 per year or an increase over the previous year of only 49.8%.
When I got this news about the new costs, I was in Iowa. As one vehicle is in Iowa over 50% of a year, I went to our Iowa insurance agent and asked for a quote on that vehicle. The quotation was based on exactly the same information provided to the Texas insurance agent. In fact, we used the application form and information supplied by the Texas insurance agent. The Iowa quote for the same coverage on the vehicle was only $360 per year rather than the $1,853 per year portion quoted in the $5,701 Texas quote. Also, they included a rider allowing the car to be garaged in Texas about 50% of the time.
However, there was a slight hitch. Seems that the driver of the Iowa based vehicle would have to apply for a new Texas or Iowa drivers license about every six weeks. Not a very effective solution.
About a month later in February 1993, I received a fat envelope in the mail with the actual insurance policy inside. But who had ever heard of the insurance company? Certainly not me or my insurance agent. There are agents who specialize in high risk applicants and they write policies on mutual insurance companies.
After spending two hours trying to read the policy, I was confused about whether I had any valid insurance coverage.
Perhaps, someday insurance policies will be written so that the insured can understand what is covered and what is not. In fact, even lawyers for the same insurance company argue the interpretation of various coverages. A requirement for all insurance policies ought to be clear language and not legalese.
The Texas State Insurance Board indicated that the net worth of the mutual insurance company that wrote the policy was less than $2 million dollars. In this day of megabuck awards, one must wonder about the financial viability of this company.
The legislature and the insurance commission are only concerned that you have an insurance policy. Whether the company has the reserves to pay claims is unimportant. Sometimes I wonder what the 1,300 employees at the Texas State Insurance Board really accomplish.
If the purpose of regulation is to see that the consumer gets a fair shake, and that the insurance companies have reserves to meet claims, why are mutual companies with a net worth of less than $2 million still allowed? How many more insurance company failures are needed to make the point!
The law does state that in lieu of an insurance policy, a person can provide proof of financial responsibility. If you are applying for a drivers license, you just fill out a form stating that you do not own an automobile.
But if you own a car, the answer is more complex. There are provisions in the act that allow the Department of Public Safety in Texas to designate a vehicle owner as financially responsible if:
That is, if in the Department's judgement, it is satisfied that you "are possessed and will continue to be possessed of ability to pay judgments obtained against such person."
Now, I find the last option, a real interesting one. Perhaps, we should go to the auto auction and buy 25 junkers for $50 each and seek to qualify as self-insured. These alternatives do not present realistic solutions. Thus, the law-abiding citizen must meet the states insurance mandate at any cost because of the high-risk pool policies.
But the uninsured drivers still don't have insurance. One industry source estimates that today only about 75% of the automobiles traveling the highways in Texas are insured. After all, the fine for the first offense is only $375 and that isa lot less costly than buying insurance.
When the state mandates that we carry auto liability insurance, the state should also require that such insurance be affordable. Maybe if the insurance commission put the entire state pool of drivers out for bid once a year, the low bidder would not require minimum wage earners to work about 10 weeks a year to pay for the minimum required insurance coverage.
Policy holders should not have unfavorable notations made on their file when they are held blameless in an accident. As beleaguered consumers, we all ought to examine our auto insurance costs and our loss records to see if we are getting a fair shake. In my case, the windshields would have cost $950 and the $1,908 charged against my policy (largely to fix the car stolen by the fleeing robber) will be paid many times over in increased premiums. Like I said earlier, "We'll insure you as long as you don't have any bad things happen to you such as God forbid, an accident!"
Oh, yes, we now have our auto liability insurance with Aetna Casualty again through a new agent. The good news isthat the annual premium is only $2,757, or a decrease from 1992. Is it any wonder that we have a problem!
But then, 'Tis Only My Opinion.
Fred Richards
June 1993
This issue of 'Tis Only My Opinion was copyrighted by Adrich Corporation in June 1993.
It is intended to provoke thinking, then dialogue among its readers. Quotation with attribution is encouraged.
Last updated - July 3, 2008
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