Incentive Effects of No-Fault Automobile Insurance: Evidence from Insurance Claim Data

Abstract

This paper investigates the effects of no-fault on automobile property damage claim frequency in the United States. No fault restricts the right to sue for bodily injury liability (BIL), but most U.S. no fault laws make no change in the legal rules involving property damage claims. Thus, an analysis of property claims can reveal the indirect effects of no fault on incentives. The principal finding is that no fault induces drivers to shift property claims from property damage liability (PDL) coverage into collision (first party property damage) coverage. With the elimination of some BIL claims under no fault, the expected recovery under tort is reduced so that first-party property claims become more attractive relative to PDL claims. Thus, no fault may facilitate experience rating since a higher proportion of claims come to the attention of the driver’s insurer. The effect no fault on total claims is less conclusive. However, controlling for the size of the residual market, no fault appears to be positively associated with total property claims frequency.