Under Pay as You Drive insurance

Under Pay as You Drive insurance (PAYD), drivers would pay part of their automobile insurance
premium as a per-gallon surcharge every time they filled their gas tank. By transfering a portion of
the cost of owning a vehicle from a fmed cost to a variable cost, PAYD would discourage driving.
PAYD has been proposed recently in California as a means of reforming how auto insurance is
provided. PAYD proponents claim that, by forcing drivers to purchase at least part of their
insurance every time they refuel their car, PAYD would reduce or eliminate the need for uninsured
motorist coverage. Some versions of PAYD proposed in California have been combined with a
no-fault insurance system, with the intention of further reducing premiums for the average driver.
Other states have proposed PAYD systems that would base insurance premiums on annual miles
driven.
In this report we discuss some of the qualitative issues surrounding adoption of PAYD and other
policies that would convert other fiied costs of driving (vehicle registration, safety/emission
control system inspection, and driver license renewal) to variable costs. We examine the effects of
these policies on two sets of objectives: objectives related to auto insurance reform, and those
related to reducing fuel consumption, C02 emissions, and vehicle miles traveled. We pay
particular attention to the first objective, insurance reform, since this has generated the most interest
in PAYD to date, at least at the state level. We review the history of PAYD proposals in
California, summarize previous research on the impacts of PAYD, and discuss the elements and
design of a PAYD system.
There are two basic types of insurance coverage that pay expenses incurred in an auto accident:
first party coverage (e.g. medical payments, personal injury protection, uninsured motorist, etc.),
which pays the policyholder’s expenses, and third party coverage (Le. bodily injury and property
damage liability coverage), which pays the expenses of the victim of the policyholder. The type of
insurance coverage utilized depends on the liability system in a particular state. Third party
coverage is necessary in the 26 states with tort liability systems, which rely on determining which
driver caused an accident. Only first party coverage is necessary in the 10 states which have
adopted a no-fault system, where a policyholder’s damages are paid by one’s own coverage,
regardless of who is at fault.
A true no-fault system would eliminate a victim’s right to sue for non-economic damages (for
either so-called “pain and suffering” or punitive damages). However, no existing no-fault systems
have such a strict restriction. Instead, they only allow liability lawsuits for non-economic damages
if the damages exceed a “threshold”. This threshold can take the form of a monetary amount
(which can be quite low, and therefore pose a negligible restriction), or legislative language that
specifies injuries (such as “permanent disability” or “death”). If the injuries exceed the dollar
threshold, or meet the legislative language of the verbal threshold, then the victim can sue the atfault
driver for non-economic damages. Only three no-fault states currently have strict verbal
thresholds; as a result, the effectiveness of most no-fault systems in restraining liability lawsuits is
limited. The remaining 11 states, and the District of Columbia, require insurers to offer first party
coverage, but have not adopted restrictions on liability lawsuits; these states are referred to as “addon7,
states.1
Average insurance premiums for all coverages range from $319 in North Dakota to $974 in
Hawaii. Combined (bodily injury and property damage) liability premiums range from $171
(North Dakota) to $753 (Hawaii). Unfortunately, state-level data on premiums for uninsured or
underinsured motorist coverage are not available, so it is not possible to determine the potential
national savings from forcing all drivers to purchase insurance under a P A W system.