Automobile Insurance and Tort Reform

1. Automobile Insurance and Tort Reform Jacqueline Friedland November 27, 2003

2. Nothing Particularly New or Unique in Tort Reform • Elimination of collateral source rule • Caps or limits on awards • Change from gross to net income basis • Greater use of structured settlements

3. Elimination of Collateral Source Rule • According to collateral source rule, damages are not reduced by other “collateral” sources • Collateral sources: private or employer health and disability plans, workers’ compensation, Canadian Pension Plan • Collateral source rule reflects negligence and deterrence principles of tort law • Liability today is increasingly focused on compensation • Result is overcompensation, with increased costs of system borne by all

4. Caps or Limits on Awards • Most well-known of all tort reforms • Cap on pain and suffering for minor injuries • Only pain and suffering cap – full access to tort system for all other categories of damages • Difficulties: • What should the cap be? • How do you quantify impact with limited data? • What is a minor injury? • Is psychological injury included with physical?

5. Change from Gross to Net Income Basis • Some argue that using gross income overcompensates • Cost of overcompensation passed to all through higher premiums • Compensation at 100% of gross wages is a disincentive to return to work • Primary argument for use of gross is the implicit “gross up” for future taxes and investment management fees

6. Greater Use of Structured Settlements • Lump sum award for future care and future loss of income replaced by annuity • Always on list of suggested tort reforms • However, impact rarely quantified • Benefits to: • Insurer • Injured party • Society

7. Proposed Changes in Rating Variables • Another significant area of consideration and debate • Remove age, sex and marital status • Territorial rating is also an issue • Actuarial Standard of Practice