• SECTION 1. SHORT TITLE
• SEC. 2. FINDINGS
• SEC. 3. PURPOSE
• SEC. 4. DEFINITIONS
• SEC. 5. AUTO INSURANCE PAYMENT OPTIONS
• SEC. 6. APPLICABILITY TO STATES; AND JURISDICTION
• SEC. 7. EFFECTIVE DATE

SUMMARY

Per Mile Auto Insurance Option Act of 1998 - Affords car owners the right to choose between two easily evaluated options: (1) paying for insurance in proportion to vehicle miles actually driven (per mile insurance); and (2) the current payment method (time period insurance).

Because accident costs are produced by driving cars and not by owning them, charging insurance as an ownership cost under the current time period insurance method results in such serious problems as unaffordability, perverse incentives against car owning, and unreliable risk-cost data.

Under the Act, auto insurers would probably require prepayment for per mile insurance (unlike metered utilities); odometer readings would serve to show the limit of policy protection paid; car owners would buy miles of protection at the cents-per-mile price determined by risk class and coverage and would be responsible for buying more miles as needed to keep the car insured, as required by law in most states.

Current odometer law is sufficient to deter fraud for per mile insurance; private company methods of mileage auditing and odometer checking would readily become efficient and economical under the pressure of competition on service and cost. A policy provision would automatically make the car uninsured if the odometer is tampered with.

(Sec. 5) Requires private passenger automobile insurers, who now provide only time period insurance, to provide the added OPTION of per mile insurance to prepay driving coverages.

(Sec. 5) Requires insurers to use the same risk classes (by territory, declared future use except where redundant, and driver type) with both prepay methods to allow car owners to compare costs.

(Sec. 5) Provides for underwriting rules to encourage option uniformity for cars in a household.

(Sec. 6) Declares that this Act does not apply to a State's auto insurers if the State so elects.

BILL

105th CONGRESS, 2nd Session, 1998

M_______ introduced the following bill; which was referred to the Committee on Commerce

A BILL To provide for competition between units of payment for private passenger automobile insurance, to permit car owners to choose the unit of insurance each deems appropriate, to guarantee affordable premiums, to provide statistically sound information on the cents-per-vehicle mile cost of risk, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘Per Mile Auto Insurance Option Act'.

SEC. 2. FINDINGS.

Congress finds that—

(a) IN GENERAL- Major problems of unaffordability, inadequate coverage, market failure, and consumer resentment can be attributed to conflict between two undisputed facts. The first fact is physical and immutable and the second is a financial arrangement:

(1) FACT 1: AMOUNT OF EXPOSURE TO ACCIDENT RISK VARIES AND IS A COST OF OPERATING CARS BECAUSE
 
(A) each mile an individual car is driven exposes it to accident risk and therefore each car mile traveled contributes to insurance cost;

(B) insurance protection—like gasoline—is only needed while a car is driven;

(C) overall reduced driving exposure to risk caused by a shortage of gasoline, or a sharp increase in its price, lowers the number of accidents and claims and thus lowers insurers' costs (but not their premium income—a result of Fact 2);
 

(2) FACT 2: PREMIUMS NOW MUST BE PAID AS A FIXED COST OF CAR OWNERSHIP BECAUSE:
 
(A) auto insurance attaches to the vehicle and, in states with compulsory coverage, is a requirement for its registration and licensing—like an annual car tax;

(B) only time period insurance is available to car owners;

(C) advance premium must be paid for a coverage period at a class price based on the insurer's past average cost per car year by territory, declared future use, and demographics of household drivers, but no premium adjustment is made at the end of the period regardless of how much or little an individual car was actually driven;

(1) the cost of owning a motor vehicle may be prohibitive due to insurance charges;

(2) significant limitation in access to and purchase of motor vehicles—

(A) damages the economic well-being of many low-income individuals; and

(B) creates an unnecessary financial impediment to car sales and manufacturing, which are critical components of the economy of the United States;
 

(3) political pressure to keep mandatory coverage at low values, and the financial pressure that forces many car owners to choose these minimum coverage values, results in—

(A) significant transfer of the injury costs of car accidents to employer-sponsored and other general health insurance plans;

(B) transfer of catastrophic injury costs of car accidents to family savings and care-taking resources—disparately onto women—and eventually to taxpayers through Social Security, Medicaid, and Medicare;

(C) unbearable car ownership cost burdens on lower-income groups (minorities, women, and older drivers), imposing on them the Hobson's choice of driving uninsured, often unlawfully, or curtailing essential needs, such as adequate food and shelter;
 

(4) political pressure for statutory and regulatory suppression of premium rates which produces—

(A) inflated approval requests for rate increases;

(B) periodic disruptive double digit increases;

(C) cost shifting between coverages and classes;

(1) through spiral breakdown of affordability in some urban territories that causes high annual premiums to result from the following chain of circumstances:

(A) in single car households, a rise in the insurance cost of car ownership (Fact 2):

(i)   prompts older and lower income drivers, whose cars are driven less than average, to give up their cars;

(ii)  because their cars were less exposed to risk of accident cost, their quitting takes more premium than accident cost out of their car's class;

(iii) with a greater proportion of high exposure cars left in the class pool, the number of accidents per car rises (Fact 1), forcing insurance premiums up, which causes the cycle to repeat;
 

(B) in multi-car households, a rise in the insurance cost of car ownership (Fact 2):

(i)   prompts households to give up their marginal cars;

(ii)  causes the average mileage of household drivers to decrease because they must share fewer cars;

(iii) but also causes the mileage per car to rise as fewer cars are shared by the same drivers;

(iv) causes greater annual exposure to risk per car which raises average accident cost per car for the territory (Fact 1);

(v)   resulting increase in insurance cost of ownership forces sale of more marginal cars, which causes the cycle to repeat;
 

(2) when unemployment or the price of gasoline rises

(A) many cars are driven less because of economic uncertainty or to save on gasoline expense;

(B) the number of insurance claims decreases (Fact 1) without any decrease in premiums (Fact 2), which provides a windfall to insurers, or;

(C) mutual insurers who do make refunds—20 percent of the premiums paid in some states in 1991—spread them uniformly to all insureds so that the savings produced by those using their cars less become cash windfalls to owners of cars driven more than average;
 

(3) when average driving drops and produces premium windfalls, and when the corollary circumstance of an increase in driving accompanying a good economy and cheap gasoline prompts auto insurers to seek regulatory approval for price increases, it proves that currently premium is fixed and does not vary with the amount an individual car is driven, Fact 2;

(4) when insurers are unable to provide information on changes in risk per mile resulting from new safety devices because they only collect class cost data on a vehicle year basis;

(5) when newer cars and cars with optional safety devices average more claims annually than older cars and cars without the optional safety devices, it is because

(A) miles of travel and car value are both normal goods: demand for both rises with income level. When safety devices are optional, the buyers of new cars who take the option also tend to drive more than those who do not;

(B) therefore, when class costs are compared on a car year basis, as auto insurance does, the effect of the safety device on reducing the risk rate may be offset or even overwhelmed by the greater annual miles of on the road exposure to risk averaged by the cars with the new device;

(C) newer cars predominate in the safety device discount class and older cars predominate in the non-discount class.

(D) the non-discount class, with older cars and a lower average mileage, shows lower annual cost even though risk per mile for the class might be greater than for the discount class. The higher annual accident cost average of the safety device class makes the device an apparent failure.

(1) offering a nominal 15 to 20 percent discount for a prepayment declaration of "estimated future mileage" less than 7500 or 8000 miles in the coming year, but they

(A) do not check odometers and make no adjustment at the end of the policy year if mileage actually driven merits more or less premium than prepaid;

(B) have given up the "estimated future mileage" discount in some companies because, under the pressure of price competition, it was being awarded to twice the proportion of cars as federal statistics show would qualify;

(C) have testified at state regulatory hearings that to subsidize price competition for the high mileage class they keep the low mileage discount much smaller than justified by its lower cost experience;
 

(2) offering "suspension of coverage" with refund of premium for periods of non-driving, but they—

(A) usually require a minimum 30 day out-of-service period;

(B) may retain a significant portion of liability premium (40%) if license plates are not surrendered to the state during the suspension period;

(C) may need permission from lienholders;

(D) do not inform their insureds about the existence of the suspension of coverage provision unless asked;
 

(3) providing for car owners in military service as during the Desert Shield and Desert Storm campaigns (1990-91) when—

(A) some insurers impounded cars at military bases as a condition of suspending coverage for the period owners were overseas;

(B) other insurers returned partial premium to service members merely on proof of overseas service without regard to whether or not the car continued in use while its owner was away;

(1) charging cents-per-mile prices for the car's risk class and the kinds and amounts of coverage amount chosen would:

(A) automatically suspend charging premium whenever the vehicle is not being driven thus making it unnecessary to suspend coverage when car use is interrupted, whether for short or long periods;

(B) tie individual premium to individual risk: insurers would earn prepaid premium mile-by-mile only while the car is exposed to risk of accident;

(C) give market value based on class-measured cost to the individual risk of car use;

(D) let individual owners control their premium expense by controlling how much the car is driven;

(E) give the price signals about the risk cost—as gasoline prices do for fuel cost—for deciding whether or not to take a car trip;

(F) allow consumers to evaluate the "safety" efficiency of cars through cents-per-mile insurance charges based on experienced per mile costs for different cars;

(G) make adequate coverage affordable, including unlimited coverage for catastrophic injuries;

(H) tie insurers' income to actual driving exposure, causing premium to automatically rise and fall with driving amount and thus prevent the current problem of insurer windfalls and shortfalls from unanticipated changes in the economy and gasoline prices;

(1) insurers would convert exposure units from dollars per vehicle year to cents per vehicle mile travelled by:
 
(A) using the existing cost per car year for each territory and class in a state (these values are now routinely determined for each class as the total experienced cost of claims divided by number of car years insured during the experience period);

(B) obtaining a class-average mileage per car year from the sum of the individual odometer-measured mileages of each class population;

(C) dividing the average car year cost from (A) above by the average car year mileage from (B) above to provide insurers' cost in cents per car mile as the required basis for the class per mile price. (For example: (class avg. $500 cost per car year)/(class avg. 10,000 car miles per car year) equals 5 cents per car mile experienced cost.)
 

(2) insurers would require car owners choosing per mile insurance to:

(A) pay premiums in advance of driving exposure, which is in accord with standard prepayment practice for keeping the policy protection in force;

(B) buy the number of miles of protection they need to suit their individual driving needs, convenience, and budgetary constraints (e.g., buying 6,000 miles at a class rate of 5 cents per mile for $300, expecting to cover about nine month's driving);

(C) buy more miles of protection as needed;

(D) apply unearned premium from unused pre-paid miles to the next annual policy period, or have premium refunded if not renewing the policy;

(E) have in-force limits set by both policy year and odometer reading as shown on the car's insurance I.D. card;

(F) as a condition of policy renewal take car for its annual audit, including a physical check of the odometer and tamper-evident seals (applied during the initial check), at a conveniently-located garage designated by the company;
 

(3) insurers would add policy language that

(A) ends policy coverage when the odometer reaches the end of prepaid mileage;

(B) voids policy coverage if the odometer has been tampered with;

(1) broad use of odometers for commercial and tax transactions provides strong institutional interest in reliability and fraud prevention;

(2) odometers are used for—

(A) transactions calculated at cents-per mile rates, such as:

(i)   business expense tax deductions (31.5 cents per mile in 1997);

(ii)  expense account reimbursement;

(iii) car rental charges;

(iv)  excess mileage charges under lease contracts;

(B) limits to warranty and other contractual benefits, such as:

(i)   mileage limits to manufacturer' warranties;

(ii)  mileage limits to repair warranties;

(iii) mechanical breakdown insurance incremental distance limits;

(iv)  lease contract mileage for start of per mile charges;
 

(C) valuation of depreciation for trade in used cars;
 
(3) fraud is deterred by—

(A) federal law—Odometer Act as amended, sections 1901, 1981—1991 of title 15, United States Code—and state law requiring that every mile a car is driven be permanently recorded on its odometer

(B) civil and criminal sanctions for odometer tampering to violate (A);

(C) mechanical breakdown insurance policies which provide that—

(i)  evidence of odometer tampering—discoverable in adjusting a claim—voids the insurance coverage;

(ii) odometer disconnection voids coverage;
 

(D) since the early 1980s models, engine controls for smooth operation require the odometer to be connected;

(E) odometers manufactured in the last 15 years break if an attempt is made to spin them backwards with a high speed drill;

(F) meter-tampering professionals can be identified through plea-bargaining by apprehended patrons;

(G) patrons can be identified through plea bargaining by apprehended meter-tampering professionals;
 

(4) audit trails—date and odometer reading for the car's mileage history—are provided by—

(A) state title transfer certificates;

(B) periodic safety and emissions inspection records;

(C) service and repair invoices, which many states require on a customer's copy to control unauthorized use when the car is left for servicing;

(1) State insurance law and regulation of automobile insurers—under the McCarran-Ferguson Act of 1945, sections 1011—1015 of title 15, United States Code—has authority to enforce and adjudicate complaints on

(A) provision of exposure unit option;

(B) classification uniformity between exposure unit methods;

(C) any other matter related to the provisions of this Act;

SEC. 3. PURPOSE.

The purpose of this Act is to allow consumers of motor vehicle insurance protection to pay for insurance as an operating cost or ownership cost by choosing between

(1) the current vehicle year exposure unit—and its time period subdivisions—for all coverages

(2) the vehicle mile exposure unit, which insurers now make available for some commercial vehicle insurance, to provide each car owner—
 

(A) the same control they now have over gasoline expense according to vehicle miles traveled;

(B) the ability to reduce premiums for driving coverages proportionally from their present amount without sacrificing coverage; and

(C) the option of reducing their current insurance premium for a car by driving it less than the annual mileage average for its risk class.

SEC. 4. DEFINITIONS.

In this Act:

(1) EXPOSURE UNIT - The term ‘exposure unit' means the measure of the loss exposure assumed by an insurer. The premium for a policy is calculated by multiplying the rate or rates by the number of exposure units. In private passenger automobile insurance
 
(A) the exposure unit is one car-year, that is, one car insured for one year.

(B) the alternative exposure unit provided by this Act is one car-mile, that is one car insured for one mile.
 

(2) DRIVING COVERAGE - The term ‘driving coverage' means all automobile coverages for losses by accident, generally including but not limited to third party liability (property damage and bodily injury), first party medical expense, income loss, and collision damage to the insured car; excludes parts of coverage grouped under "other-than-collision" or, alternatively "comprehensive" for fire, hail, and theft, but would include collision with animals, and glass breakage while on the road.

(3) INSURER- The term ‘insurer' means any person who is engaged in the business of issuing or delivering motor vehicle insurance policies.

(4) STATE- The term ‘State' means any State of the United States, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa, the Commonwealth of the Northern Mariana Islands, the Trust Territories of the Pacific Islands, and any other territory or possession of the United States.

SEC. 5. AUTO INSURANCE PAYMENT OPTIONS.

(a) OPERATION OF THE PAYMENT OPTION- Under this Act, an insurer providing private passenger automobile insurance shall offer the owners of cars they insure a choice between the following two exposure units for all driving coverages:

(1) VEHICLE YEAR EXPOSURE UNIT- car year, and time period subdivisions thereof, as the cost and dollars per year price unit of the car's risk class for calculation of premium charges.

(2) VEHICLE MILE EXPOSURE UNIT- audited odometer miles as the cost unit and cents-per mile price unit of the car's risk class for calculation of premium charges.

(1) for both exposure units insurers shall maintain the same:

(A) make and model ratings;

(B) territorial classes;

(C) class plan by driver demographics and car use, except that the "Use" classes (Farm, Pleasure, Distance to Work, Business, declared "Estimated Future Mileage") may be variously combined for the car-mile exposure unit to avoid any redundancy with measured miles of exposure;
 

(2) insurers shall clearly identify transaction expense fees according to the character of the transaction (such as fees for optional reduced period payment plans used with the vehicle year exposure unit and odometer audit charges used with the vehicle mile exposure unit);

(d) RULES TO ENCOURAGE UNIFORMITY OF OPTION CHOICE- In order to minimize conflict between the exposure unit options described in subsection (a), insurers may maintain and apply underwriting rules that require uniformity of exposure unit for all cars on a policy.

SEC. 6. APPLICABILITY TO STATES; AND JURISDICTION.

(a) ELECTION OF NONAPPLICABILITY BY STATES- This Act shall not apply with respect to a State if such State enacts a statute that--

(1) cites the authority of this subsection;

(2) declares the election of such State that this Act shall not apply; and

(3) contains no other provision.

(1) cites the authority of this subsection;

(2) declares the election of such State that this Act shall apply; and

(3) contains no other provision.

SEC. 7. EFFECTIVE DATE.

This Act shall take effect two years after the date of enactment of this Act.