What’s the Deal with State-Sponsored Auto Insurance?

Low-income drivers on both coasts can now get basic insurance directly from the insurance department of the state they live in-as long as that state is New Jersey or California.

Affordable, state-sponsored auto insurance could be good news for low-income drivers who need a car in the 45 states with stringent mandatory insurance rules, and a federal program for making such assistance available-the Auto Choice Reform Act-has been discussed since 1998.  At that time, the National Association of Independent Insurers (NAII) commissioned a study to determine the impact of affordable, state-sponsored insurance on the lives of low-income citizens.

The study found that, in 1991, U.S. households overall spent 2 percent of their annual income on car insurance. Low-income residents in Maricopa County, Arizona, spent up to 30 percent of their annual income on auto insurance.  But they had to have reliable private transportation to their jobs-as do most Americans-and often paid for car insurance while jeopardizing other necessary purchases.  This study found that 44.1% of respondents could not buy food at least once because that money had to be spent for car insurance.

In response to this information, California legislators made extension of the state’s mandatory insurance law contingent on developing a state-sponsored, affordable insurance program.  Naturally, the legislators expected it would be wildly popular, but experience has shown that only 4,000 drivers had taken advantage of it by 2003, for a number of reasons.

Among those reasons are:

 

  • The need to meet a tough financial eligibility rule.
  • For some, the cost-at approximately a dollar a day-was still too high.
  • Even a dollar a day was not low enough to cause already-covered, low-income drivers to switch; California’s bare-bones package offers no medical coverage to the policyholder, just to passengers.

 

In 2003, eligibility requirements and price were adjusted so that more drivers would qualify. The program now requires a policyholder’s annual income to be no more than 250 percent of the federal poverty level, or about $38,000 for a family of three. (The standard had originally been 150 percent.)

Liability coverage, at $10,000 for bodily injury to one person, is lower than the state’s minimum liability limits for private coverage, but insurance industry data show 90-percent of bodily injury claims are for less than $10,000.

The New Jersey plan, available for the first time in 2003, is slightly more extensive, paying up to $15,000 of most medical expenses due to an accident, and providing coverage for catastrophic injuries, such as severe brain damage, up to $250,000. Eligibility is based on standards for Medicaid. 

Acceptance of these policies by low-income drivers could be good news for all drivers in the states that have them.  For one thing, these policies eliminate the hassle that occurs in accidents with uninsured motorists.  This should make them attractive to the insurance industry as well as drivers.  For another, they would relieve an enormous amount of stress on low-income working families, and any stress reduction in U.S. society-particularly on the roads-would have to be a good thing.

Is there a downside for the insurance industry or for individual drivers? 

Not really, although the California program was begun partially in response to lobbying by insurance companies that wanted to impose a surcharge on drivers for temporarily dropping coverage or having been previously uninsured.  California’s legislators found that idea punitive and counterproductive.  But some states, Maryland for example, continue with very costly automatic uninsured driver coverage, and without an elective plan to cover those who have trouble paying market-priced insurance bills.  Maryland’s coverage kicks in the second a driver’s insurance lapses, regardless of the reason for the non-payment; forgetfulness, bank error, and/or poverty are equally penalized under the law.

A survey for the California Department of Insurance said that the poor want to comply with mandatory auto insurance laws.  It suggests developing a product that clearly and directly benefits the poor and is “affordable, such as an under-$300 policy that provides medical benefits and lost wage coverage.” 

That’s a small step for California…but a huge leap for states like Maryland and 42 more that have yet to consider organizing auto insurance assistance for the low-income drivers.

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