Which ten cities in the U.S. have the highest auto insurance rates? Which ten cities have the lowest rates? To find the answer, a financial website called nerdwallet compared the averages rates charged in the 125 largest U.S. cities. The hypothetical buyer was a 26-year-old male driver with no prior accidents. The results of the study are eye-opening. Detroit's rates were the highest by far. In that city, the annual premium for a young male driver is a whopping $10,723!


Winston-Salem had the lowest premium at $969. The study focused on personal auto rates charged for one of the riskiest groups of drivers (young males). Nevertheless, many of the factors that determine personal rates affect the rates used in commercial auto policies as well.

One interesting fact about the Nerdwallet study is that eight of the ten cities with the highest auto insurance rates are located in states that have no-fault laws. I have no personal experience with these laws since I have never lived in a state that had one. No-fault auto laws were initially conceived in the 1920s. Yet, it wasn't until 1970 that the first no-fault law was passed in Massachusetts. By the mid-1970s, 24 states had enacted some type of no-fault law.

No-fault laws have two main goals. One is to compensate auto accident victims more quickly than the traditional tort system. A second goal is to make auto insurance more affordable by reducing the cost of claims. To these ends, no-fault laws permit (or require) injured parties to seek some compensation directly from their insurers.

Some states have attempted to reduce costs by restricting the use of lawsuits. These states permit accident victims to file lawsuits only if they have sustained injuries that exceed a specified threshold. This threshold may be a monetary amount (such as $2000) or a description (such as a "serious" injury). Since their heyday in the 1970s, no-fault laws have been repealed in about half of the states that had them. Currently, these laws exist in only 12 states.

As is evident from the nerdwallet study, no-fault laws have not reduced auto premiums. What has gone wrong? One problem is fraud. In no-fault states policyholders are permitted (or required) to purchase a coverage called personal injury protection (PIP). This coverage is similar to Auto Medical Payments except that it is broader. Many policyholders seek recovery for the entire PIP limit. Some even stage fake accidents in order to receive this benefit. PIP has become very profitable for criminals, particularly in Florida and New York.

Ironically, another problem in no-fault states is litigation. The Rand Corporation looked at the volume of lawsuits in no-fault states to that in states without no-fault laws. The comparison indicated that in their early years, no-fault laws seemed to suppress litigation. Unfortunately, this effect diminished over time. After the laws had been in effect for several years, litigation rose. Moreover, an increasing number of claimants in no-fault states hired attorneys. Rand also found that between the 1980s and 2006, both average liability premiums and premium growth were higher in no-fault states than in states without no-fault laws. During this period, several states that repealed their no-fault laws experienced a significant drop in auto liability premiums.

No-fault laws' primary drawback is cost. One reason the laws can be costly, according to the Rand study, is that they shift some medical costs from health insurance to auto insurance (under PIP). The laws might control costs more effectively if they required medical insurance to be billed before PIP. Medical insurers have more experience managing health care costs than auto insurers. Rand also suggests that more states could follow Pennsylvania's example. That state allows vehicle owners to choose a low-cost insurance policy that comes with a verbal threshold. No-fault laws have succeeded in getting benefits to accidents victims more quickly than the tort system. For many people, speedy recovery may be worth the extra cost.

Finally, don't miss my new article on the Longshore Act. This law can create costly surprises for small business owners that perform operations on or near navigable waters.

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