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The politics of auto insurance

There may be a lot of reasons to vote for James McGreevey in the race for New Jersey governor.

After all, he's a Democrat, as, most of the time _ and with enthusiasm _ am I.

But when it comes to auto insurance reform, a topic I have spent all too much of the last 17 years studying, I'm sorry to say that McGreevey has either turned demagogue or, as I prefer to think, simply been poorly advised.

Today in New Jersey, drivers can buy either the "Cadillac" policy with no restrictions or one that restricts the right to sue. The majority of New Jersey consumers choose the latter, cheaper option.

Gov. Christine Todd Whitman wants to broaden that choice further. At one extreme would remain the Cadillac option, offering the unrestricted right to sue for pain and suffering. But at the other extreme (with two choices in the middle) would be the option to give up altogether the right to sue another driver for pain and suffering. (You could still sue to recover your medical and rehab costs and lost wages; you could still sue GM or State Farm.)

My guess is that most "personal finance commentators" would endorse the fourth, least expensive, option as the best deal.

McGreevey's plan is to stick with the current system, but order a 10 percent rate cut that he says insurers can absorb by cracking down on fraud. One might think it's already in their interest not to pay fraudulent claims, and that many insurers already are tough in parting with money, but McGreevey's position is that they can do better.

In California, nearly two-thirds of the $7-billion consumers pay annually for the "people" portion of auto insurance (not theft or car damage) goes to lawyers and fraud. New Jersey's ratio is doubtless lower but still appalling.

Right now, the $9-an-hour New Jersey laborer is required to pay a premium that goes in part to pay $125-an-hour insurance company lawyers to fight his claim, should he have one; he pays another 33 percent plus expenses to his own lawyer, typically, should he win, plus the cost of the padded and fraudulent claims the system fosters.

Why not give this poor guy _ and the rest of us _ the choice to remove ourselves from the pain-and-suffering lawsuit lottery? Rates for the "people portion" of auto insurance would almost surely drop dramatically. As for the fraud problem, the solution is to remove the incentive to commit fraud.

In Michigan, the only state with a true no-fault system, people are less than one-third as likely to claim "whiplash" after an accident as California drivers.

Why? Because in Michigan, unlike California or New Jersey, drivers get no cash bonus for pretending their necks hurt _ only medical care, rehab and reimbursement for lost wages. As a result, Michigan drivers pay much less for personal injury insurance, yet are far better covered, on average, when they are really badly hurt.

New Jersey's current system aimed to bar lawsuits for all but the most serious injuries. Yet, over the years, what was intended to be a strong test before suits were allowed, as in Michigan, has eroded. The lawyers love it. And they have doubtless done all they can to persuade McGreevey not to let consumers out of the game.

Whitman, in a plan much like one that Sen. Daniel Patrick Moynihan of New York and others are pushing in Congress, wants to give them that choice.

"Just tell them you'll order rates down 10 percent," you can almost hear McGreevey's advisers whispering in his ear. It would be terrible economics, it is probably unconstitutional, and it wouldn't work. But it could win votes, which sometimes, sadly, seems to be all that matters.

Andrew Tobias, a financial writer, has written extensively on auto insurance.

New York Times