Automobiles are much safer today than they used to be. Perhaps the best illustration of this fact is the decades’ long decline in the number of auto-related deaths per-mile-driven.
And yet motor vehicles—including cars, trucks, and SUVs— continue to be among the most dangerous products sold anywhere. Automobiles pose a larger risk of accidental death than any other product, except perhaps for opioids.
Annual auto-crash deaths in the United States have never fallen below 30,000, reaching a recent peak of roughly 40,000 in 2016.
In addition to these tens of thousands (internationally, millions
) of deaths attributable to motor-vehicle crashes, there are many other social costs. Victims of serious auto accidents, for example, often incur extraordinary medical expenses both to provide treatment immediately after the accident and, sometimes, to provide treatment for the rest of their lives.
Those crash victims whose injuries render them unable to work can experience weeks, months, even years of lost income, which, from their employers’ perspective, is lost productivity.
Auto accidents also cause non-trivial amounts of property damage, mostly to the automobiles themselves though also occasionally to highways, bridges, or other elements of transportation infrastructure. Finally, serious motor vehicle accidents often cause severe noneconomic injuries—that is, severe “pain and suffering”—as a result of accident victims’ painful and debilitating physical injuries. According to some estimates, such noneconomic harms, in the aggregate, amount to more than twice the magnitude of the aggregate economic damages caused by auto accidents.
All of this may be about to change. According to many auto-industry experts, the eventual transition to driverless vehicles will drastically lower the economic and noneconomic costs of auto accidents.
Why might this be so? Because humans are so bad at driving. When it comes to operating motor vehicles, people have bad judgment, slow reflexes, inadequate skills, and short attention spans. They drive too fast. They drive while intoxicated. They drive while sleepy. They drive while distracted. In fact, according to the National Highway Traffic Safety Administration, roughly 94 percent of auto accidents today are attributable to “driver error.”
Computers can do better. At least that is the hope: that machine-learning computer algorithms, in combination with state-of-the-art sensors and advanced robotics, will be better—much better—drivers than humans are.
Whether this will in fact be true is still unproven, but is most likely to be true with respect to so-called fully driverless “Level 5” vehicles,
which are those autonomous or connected vehicles that are capable of operating on any road and under any conditions that a human driver can handle but with no input from a human passenger other than the choice of destination.
Level 5 vehicles, because they would not suffer from the problems that plague human decision making in the driving context, do hold the promise to be substantially safer than the fully or even partially human-driven alternative.
As promising as a world of highways filled with computer-driven vehicles might be, from an accident-reduction perspective,
such a high-tech world is still only a possibility. And even if it happens, it will not be for a number of years. There continue to be major technological hurdles, as well as potential consumer resistance to actually riding in a driverless vehicle.
Therefore, the introduction, spread, and eventual dominance of Level 5s will take some time.
During that transition, most automobiles will continue to be driven mostly by humans. Indeed, even in the long run, when Level 5 vehicles have been perfected and are available to the general public either through individual purchases and leases or through some ride-sharing arrangement (via Uber or Lyft or some similar web-based platform), we should still expect to see a substantial number of fully or partially human-driven vehicles traveling alongside them.
If I am right about this picture of the automotive future, what should the role of auto tort law be, now and going forward? More specifically, if we conceive of auto tort law—including both automaker product liability and driver negligence liability (and the insurance that covers both types of liability)—as a system of ex post auto-crash deterrence, what would the optimal or efficient auto tort/insurance regime look like?
Further, how should such an optimally designed auto tort/insurance regime take into account the emergence of Level 5 vehicles?
These questions are the subject of this Article. Specifically, this Article lays out the potential (at this point purely theoretical) deterrence benefits of replacing our current auto tort regime (including auto products liability law, driver-based negligence claims, and auto no-fault regimes) with a single, comprehensive automaker enterprise liability system.
This new regime would apply not only to Level 5 vehicles, but to all automobiles made and sold to be driven on public roads.
Because such a system would make automakers unconditionally responsible for the economic losses resulting from any crashes of their vehicles, it would in effect make automakers into auto insurers as well, although such a change will likely lead to some restructuring in how automobiles are insured and sold. Or so I will argue.
My basic argument is that a comprehensive automaker enterprise liability regime may have previously unexplored, or at least forgotten, deterrence benefits.
First, it could greatly simplify our existing auto tort regime by replacing all of automaker liability law (including product design defect claims) and driver liability law (as well as existing no-fault regime) with a single enterprise liability regime under which all auto-accident victims could seek recovery. Second, it could encourage automakers to design and manufacturer safer vehicles, whether that means safer human-driven vehicles (with automated features) or Level 5 vehicles. Third, it could incentivize automakers to provide better warnings and instructions with their vehicles, including better ways to deal with the “hand off” problem that occurs when vehicles switch from semi-self-driving mode to human-driven mode.
Fourth, enterprise liability could result in automobile prices that better reflect the actual costs of driving, leading to more optimal levels of auto sales and miles driven. Fifth, enterprise liability could induce auto companies to coordinate (in a way they are not presently coordinating) with the one industry that has more information than the auto companies have about how the specific driving patterns of individual human drivers affect the risk of auto accidents: namely, the auto insurance industry. Finally, a comprehensive automaker enterprise liability regime would provide an implicit subsidy for the development and deployment of driverless technology, but only to the extent that automakers actually expect such technology to reduce accident costs. All of these points will be developed below.
The argument will proceed as follows. Part II evaluates existing auto tort law—including automaker liability law and driver liability law—from the perspective of optimal deterrence. Part III outlines one plausible version of a comprehensive automaker enterprise liability regime and summarizes the primary deterrence advantages of such a regime. Part IV briefly concludes with a discussion of caveats, concerns, and a list of questions for future research.
II. Evaluating the Deterrence Implications of Current Auto Tort Law
Automaker Liability Law
To understand the deterrence benefits of an auto enterprise liability regime, it is necessary first to understand the deterrence consequences of the current auto tort regime. To that end, this Part describes the current auto tort system—both automaker liability law and driver liability law—and, drawing on well-known insights from deterrence theory and economic analysis of liability rules, explores what the general deterrence consequences of that regime might be. This is an entirely theoretical discussion. The ultimate question—which auto tort regime comes closes to minimizing the costs of auto accidents—can of course only be answered with empirical research that is beyond the scope of this short paper.
Current automaker liability law, like manufacturer liability law generally, is primarily a negligence-based regime, by which I mean the following: Under current law in most U.S. jurisdictions, individuals who suffer harm caused in an automobile crash can recover from the automaker in tort if they can prove that the harm resulted from negligence (or a lack of reasonable care) on the part of the automaker in designing or constructing the vehicle.
Alternatively, auto accident victims can invoke modern products liability doctrine and argue that a “defect” in the vehicle’s design, manufacturing process, or warnings caused the harm.
This latter approach also typically requires some showing of automaker negligence. This is because, in the bulk of U.S. jurisdictions, important aspects of the product defect law are equivalent to negligence law.
For this reason, auto products-liability, despite sometimes being labeled a form of “strict liability,”
is in fact largely a form of negligence liability.
A negligence-based automaker liability regime can in theory have certain deterrence advantages, if one makes particular assumptions. Those assumptions, however, are keys to the analysis—and do not always apply. For starters, a negligence-based automaker liability regime can create efficient incentives with respect to automaker care levels. Automaker “care levels” are the precautions taken by automakers—in the design, production, and warnings with respect to their vehicles—that reduce the probability or severity of auto accidents.
Efficient automaker care levels occur when the automaker has made all available investments in care—in crash-risk reduction—that reduce expected auto-accident costs by more than the marginal costs of the additional care.
Thus, an efficient negligence-based tort liability rule would hold an automaker liable for the harms resulting from a given auto accident only if that automaker failed to take efficient care. For example, if there was an alternative automotive design or alternative warning that the automaker could have used that would have reduced expected accident costs by more than the marginal costs of that design or warning change, failing to deploy that alternative design or warning in their vehicles would constitute negligence on the part of the automaker, and would therefore be potential grounds for tort liability.
This sort of efficient negligence-based liability rule would induce automakers to take efficient care if we assume the following to be true: (a) that automakers are aware of the law and respond rationally to it, and (b) that courts applying a negligence-based automaker liability rules perform a thorough and accurate cost-benefit analysis (for example, judges and juries do not tend to make systematic errors in their determinations regarding what constitutes automaker negligence or what counts as a design defect). Under those assumptions, the negligence-based regime would incentivize efficient automaker care levels. Why? Because automakers would under those assumptions realize that they can avoid negligence-based liability entirely if they merely make all cost-justified investments in auto safety (e.g., all cost-justified design and warning changes). Knowing this, they would have a strong legal and financial incentives to do just that.
In addition, a negligence-based automaker liability regime can also create incentives for efficient driver care-levels—incentives for drivers to drive reasonably carefully—even in the absence of a defense of contributory negligence or comparative fault.
This is because a negligence-based regime, by its nature, leaves accident costs on victims and their insurers when the automaker is not negligent. That fact will induce drivers to drive carefully, so as to minimize their own risk of uncompensated accident losses. Again, however, this conclusion holds only if certain key assumptions are also true. Specifically, we must assume the following: a) that drivers, like automakers, are knowledgeable about tort law and respond rationally to the potential of tort rules to apply to their future conduct; and b) that drivers actually bear these costs and do not externalize them to someone else.
To put all of this together, according to standard deterrence theory, an efficiently and accurately applied negligence-based automaker liability rule can produce efficient incentives for both automakers and drivers to take care to avoid auto accidents.
But there are obvious problems with this rosy picture. First, consider the effects on automaker care levels if we relax the assumption that courts accurately apply negligence-based standards. If judges and juries are not very good at doing the complex and information-intensive analysis necessary to determine what particular automotive designs, warnings, or instructions are cost-justified or reasonable (or not defective), the outcomes of courts’ negligence determinations become highly uncertain. This can in turn produce incentives for automakers both to over-invest and to under-invest in auto safety.
The incentive to over-invest in auto safety can arise when manufacturers expect courts to set the standard of reasonable care (or a non-defective design) inefficiently high—that is, when manufacturers expect that courts may find a design defect notwithstanding the fact that the automaker’s design decisions were consistent with an accurate, objective, comprehensive risk-utility test. If that is the expectation, then automakers would have an incentive to satisfy the inefficiently high court- or jury-imposed design standard (or warning standard) in order to avoid liability. The incentive to under-invest in safety can arise if courts rely too much on custom within the industry as their source for what constitutes reasonable care, or a non-defective design or warning. This is because industry custom can (famously) lag behind what is truly efficient levels of safety.
It is not a surprise, then, that commentators have argued that custom-based standards of care, like those that currently apply to automaker liability, can inhibit innovation.
A second problem with a negligence-based auto products liability regime has to do with driver care levels. For a negligence-based regime to efficiently incentivize drivers to drive carefully (by imposing on drivers the risk of accidents that are not cost-justifiably preventable by the manufacturer), recall that we assumed that drivers are well informed of both accident risks and how those risks are allocated according to the specific rules of auto tort law. Those assumptions are obviously unrealistic. Drivers simply are not aware of the tort law rules that apply to them or the product liability rules that apply to automakers. Moreover, even when drivers do know about accident risks and legal rules, there are reasons to believe (discussed below)
either that drivers will not respond rationally to that information or that they will externalize those risks to insurance companies. If I am right about that—about drivers’ lack of information about driving risk and auto tort law, and about their cognitive biases and cost-externalization—then the ability of a negligence-based auto products liability regime to optimize driver care levels is substantially undermined. Legally imposing costs on drivers would not, or at least may not, have the desired deterrence effect on driver care levels.
The final deterrence problem with a negligence-based auto products liability regime would exist even if judges and juries were good (accurate and unbiased) at applying risk-utility or cost-benefit standards. In fact, this problem results because automakers would expect accurate application of the negligence-based rules. The problem involves the effect of a negligence-based automaker liability rule on the number of vehicles sold, or, in the language of deterrence, the effect on automaker “activity levels.”
Even an efficiently safe car (one with no defects whatsoever) that is driven carefully by its human or algorithmic driver poses some residual or irreducible risk of crashing. This residual risk will have a tendency to be ignored or externalized by automakers under a negligence-based product liability regime because automakers can virtually insulate themselves against liability by merely complying with the liability standard.
The result of this externality is that the scale of operation in the auto industry—the number of cars sold—may be higher than the social-welfare maximizing level, even ignoring the effect of automobile emissions on the environment, because the price of vehicles does not include this cost of unpreventable auto accidents.
To summarize, given how our current negligence-based automaker liability regime is applied in practice, there are reasons to be concerned that automaker and driver care levels may be too low and activity levels too high. What’s more, this concern would apply not only to human-driven vehicles, but to Level 5 vehicles as well. That is, there is nothing about the nature of Level 5 vehicles that would suggest these problems are less likely to be present than would be the case for human-driven vehicles.
This activity-level inefficiency associated with current automaker liability law has been totally ignored by those who have argued in favor of applying existing product liability standards, or revised but still negligence-based versions of existing product liability standards, to Level 5 vehicles.
Driver Liability Law
In a majority of states in the U.S., if someone is injured or suffers property damage as a result of a driver’s negligent operation of an automobile, rather than as a result of automaker negligence, the victim may recover from the negligent driver under standard common-law principles of tort.
The victim must demonstrate that the harm to her was a result of the driver’s failure to do something that a reasonable driver would have done under the circumstances, or the drivers’ doing something that a reasonable driver under the circumstances would not have done.
Accident victims who can recover include pedestrians, cyclists, passengers, or other drivers—anyone who is harmed as a result of driver negligence.
Because driver liability is also a negligence-based regime, it has similar potential to provide efficient deterrence as does a negligence-based automaker liability regime. Specifically, negligence-based driver liability law can have beneficial deterrence effects on driver care levels, if we make the following assumptions:
- Drivers are well informed about accident risks (and how their behavioral changes affect those accident risks),
- Drivers are well-informed about the rules of tort law,
- Drivers internalize those risks (do not externalize them to insurers, for example), and
- Drivers process the information about those risks rationally (without any systematic cognitive biases), and we assume again that
- Courts are good at applying cost-benefit-type negligence-based liability rules.
If all of those assumptions are true, then, for the same reason that automakers would be incentivized by a negligence-based automaker liability regime, drivers too would be incentivized to drive with efficient care—in terms of driving speed, safe braking and passing practices, smart-phone usage (or non-usage), and the like. This is so because, by taking efficient care in driving, drivers would avoid liability for the accidents that nevertheless occur. Again, under a negligence-based regime, driving with efficient care can be seen as a type of insurance for drivers, a fact that—if all of the above-listed assumptions are true—would incentivize safe driving.
The reasons that this vision of negligence-based driver liability law do not describe reality should be clear at this point. The assumptions listed above on which the analysis depends almost certainly do not hold in the real world. While drivers may be generally aware of the broad outlines of the driver liability regime in their state (whether it is fault-based or no-fault), they likely do not understand what the precise implications of that fact are on their chances of being found liable in court for unsafe driving. What’s more, the average driver, while generally and vaguely cognizant of the risks of driving, is almost certainly uneducated about the precise levels of risk associated with various aspects of driving—for example, precisely how much the chance of a crash is increased by texting while driving or changing lanes abruptly with no signal. In fact, there is a good chance that most drivers underestimate those risks.
Why would drivers tend to underestimate such risks? First, there is the long list of well-documented cognitive biases that affect how individuals process information generally.
One famous example is the tendency of individuals to ignore the risk of very low probability events and underestimate the likelihood of some high probability events.
Auto-crash risks may similarly be ignored or underestimated.
Also, drivers are especially prone to overestimating their own driving ability and thus their own ability to avoid crashes.
Moreover, drivers not only underestimate their own likelihood of a crash relative to the average driver (which they do), they also overestimate their own likelihood of a crash relative to the actual probability.
For all of these reasons, a negligence-based driver liability regime, which relies on assumptions of informed and rational drivers to produce optimal driver care levels, may not produce the deterrence benefits that are predicted by deterrence theory.
In addition, it is commonly argued that drivers have many powerful incentives to drive carefully even in the absence of a negligence-based regime that left on them the uninsured costs of auto accidents, incentives such as the desire to avoid a traffic fines or, more importantly, a crash that could be painful or even fatal to them or their loved ones.
How does this pessimistic picture of driver liability law as a system of incentivizing good driving change if we introduce auto insurance? The answer to that question turns out to be complicated. On one hand, automobile insurance has the potential to correct some of these deterrence-related problems.
Here’s why. Auto insurers are, unlike most drivers, extremely well informed about the intricacies of accident law. They employ teams of lawyers whose job is to understand how driver liability laws in each state affect the liability risks of their customers. Indeed, their profitability and their survival as going concerns depend on this expert understanding of the auto liability laws of all sorts. In addition, auto insurers have unparalleled access to enormous amounts of detailed information regarding the crash-risk characteristics of millions of drivers and automobiles. This is the result of decades of experience providing auto insurance coverage to hundreds of millions of drivers and vehicles, which in turn means pricing millions of auto insurance policies and adjusting millions of auto-crash claims over the years. No other institution or organization would have the same amount of driver-specific, automobile-specific data, as would the auto insurance industry.
In addition, recent innovations in “telematics” (which combines telecommunications, data science, and automotive technology) have increased auto insurers’ ability to gather and analyze risk-relevant driver and vehicle data.
With this new and emerging technology, not only do insurers have access to information regarding how drivers’ past auto-claims and traffic-ticket histories affect their riskiness as drivers; they also have the ability to gather information on the effects of a range of specific driving behaviors on auto-crash risks.
For example, a number of insurers currently gather information about drivers’ braking, acceleration, speeding, turning, and cornering behaviors and then send that information back to the insurers for analysis.
Once this driver-specific data is combined with data gather by insurers and others (including NHTSA) about what factors cause auto accidents generally, it becomes possible for auto insurers to link specific driving behaviors of particular drivers with premium discounts.
All of this information is to varying degrees already being taken into account by many auto insurance companies in the pricing of their insurance policies. For example, policy discounts are offered to drivers with good safety records
as well as for vehicles with particular safety features.
In addition, insurers are now offering discounts if drivers will improve their driving ability—for example, if they will take defensive driving classes.
Because of telematics revolution, auto insurers are even able to adjust premiums on the basis of the specific driving behavior of individual drivers. For example, some insurers give discounts for a range of driver-care-level factors such as wearing seatbelts, driving at moderate speeds, limiting late night trips, and avoiding aggressive braking.
Also, the advances in telematics have made “pay as you go” auto insurance, under which premiums are a function of the number of miles driven, more accurate—and thus more prevalent—than ever before.
Driving-behavior-sensitive auto insurance premiums—which could take into account both good and bad driving choices (i.e., driver care levels) and, critically, the number of miles driven (i.e., driver activity levels)—hold the promise of incentivizing risk-reducing driving behavior in a way that even the most sophisticated government regulator could not hope to do.
But here is the problem: Under current law and given existing market conditions, auto insurers do not have strong incentives to make full use of their comparative advantage at gathering risk-relevant information and pricing their insurance on the basis of that information, or at least there is reason to be concerned about their incentives to do so. The reason for concern is that the amount of coverage currently being provided by auto insurers presently represents only a fraction (in many cases a small fraction) of the total risks of auto crashes. This is true of first-party auto insurance coverage, which tends to cover only a fraction of the accident risks that any driver faces.
It is also true of auto liability coverage, owing in part to the fact that the mandatory minimum amounts in most states are far less than the maximum harm threatened by an auto accident that results in even one serious injury or death.
As a result, many of the costs of auto accidents are currently being externalized to non-auto first-party health and disability insurers who—unlike auto insurers in the telematics age—do not tailor premiums at all based on their insureds’ driving decisions.
Moreover, to the extent auto insurers do attempt to charge individualized, behaviorally- and risk-adjusted auto insurance rates (which, as I noted above, they are increasingly trying to do), this incentive is undermined by the fact that auto insurers cover only a fraction of the risks of auto accidents.
It should also be noted, however, that there are important ways in which the allocation of auto-accident risks to non-auto first-party insurers has cost-reducing advantages. This may seem incongruous with the argument in the previous paragraph, but it is not: While auto insurers are in a good position, through premium discounts, to help optimize driver care and activity levels, auto insurers are not necessarily in a good position to minimize some other costs associated with providing insurance benefits. For example, primary health care coverage provided through auto insurance companies is almost certainly much more expensive than primary health care provided through regular non-auto first-party health insurers. This would be because, although auto insurers, in a sense, specialize increasingly in reducing driver ex ante moral hazard, it is non-auto health insurance companies who specialize in reducing ex post medical moral hazard—that is, excessive or wasteful use of the healthcare system.
My point here is only that the current division of auto-accident costs, allocating so little to auto insurers, may be non-optimal, given auto insurers potential ability to incentivize better (and less) driving.
To summarize, because of drivers’ lack of accident-risk information and understanding of auto tort law and their susceptibility to cognitive biases, and because of the presence of cost-externalizing insurance coverage, there is reason to be doubtful that the current negligence-based auto tort laws—automaker liability laws as well as driver liability laws—work to optimize driver care and activity levels. As discussed in the next Part, the adoption of an auto enterprise liability regime could in theory create incentives for automakers, together with auto insurers, to provide better driver-side incentives, as well as better automaker safety incentives.
III. The Automaker Enterprise Liability Alternative
The Basic Proposal
As an alternative to our current negligence-based auto tort regime, consider the possibility of a comprehensive automaker enterprise liability regime. Under such a regime, anyone who suffers a physical injury or property damage in an automobile accident—whether driver, passenger, or pedestrian—would be legally entitled to recover, from the manufacturer of the vehicle involved, compensation for the losses sustained as result of the accident.
Thus, to recover under this enterprise liability regime, accident victims would not be required to show negligence on the part of manufacturer or anyone else. Nor would accident victims have to prove that the automobiles, or any of the warnings or instructions accompanying the automobiles, are in anyway defective or unreasonably dangerous. Rather, crash victims would need only to prove that the harms for which they seek compensation “arose out of the use of” a vehicle that was designed and built by the manufacturer from whom compensation is sought. Each automaker, therefore, would be financially responsible for the losses resulting from any crash arising out of the use of that automaker’s vehicles.
That is the most basic picture of the proposal. Now consider a few possible details of such a program. One important initial question is who exactly would fall within the class of “automakers” to whom the enterprise liability regime would apply. The most obvious class of defendants/payers would be the original equipment manufacturers (OEMs) of the vehicles involved in the crash. They are the ones who generally make the key automotive design choices, have control over the manufacturing processes, and decide on the terms of any warning or instruction manual; and they are also the ones with the greatest expertise on such questions. Auto manufacturers also determine the pricing of their vehicles and the number of them to produce, subject of course to the constraints of supply and demand. Given that manufacturer care levels and activity levels are key auto-accident deterrence variables, making OEMs responsible for the auto-crash costs associated with their vehicles has obvious deterrence benefits, discussed further below.
Liability under an enterprise liability regime, however, would not necessarily be limited to auto manufacturers. Liability could also be extended, on a joint and several basis (or on a several basis), to a range of other enterprises that fall within the design, production, sale, and distribution chain of any given vehicle.
In most cases, it is likely that the crash victim would bring the claim against the manufacturer, and then the manufacturer would either implead the other parties in the chain of production into that suit or would sue them separately in a contribution action. Precisely how the responsibility for the costs of any accident would be allocated among the various parties on the automaker side of the ledger is beyond the scope of this Article. That allocation of responsibility, however, would presumably be determined mostly by contracts among the counter-parties, which contracts should be enforced so long as the cost of auto accidents is not allocated to parties who are insolvent or judgment proof, which if permitted would undermine the deterrence benefits of the regime.
The types and amount of compensation recoverable under an automaker enterprise liability regime would probably be limited to economic losses—medical expenses, lost income, and property damage. There is of course a deterrence argument for including noneconomic or pain-and-suffering damages as well, since failing to include noneconomic damages could produce a serious externality.
However, some have argued that individuals do not desire to purchase insurance against non-economic losses (as evidenced by the dearth of pain-and-suffering insurance observed in the marketplace), and therefore should not be forced to purchase such coverage through a mandatory compensation regime.
In any event, limiting compensation to economic losses, and thus not providing compensation for noneconomic harms, is a common and reasonable political compromise that is often made when no-fault cause-based compensation regimes are adopted.
It is worth emphasizing again that the compensation regime I am imagining is a comprehensive automaker enterprise liability regime. In other words, it would apply to all automobiles (sold after the effective date of the enacting legislation), whether driven by humans, computer algorithms, or any combination of the two. Thus, unlike some other proposals for manufacturer-funded vehicle compensation regimes, my proposal would not apply exclusively to Level 5 vehicles.
Which is not to say that the regime would not have special rules for autonomous and connected vehicles. For example, whereas Level 5s may be in fewer accidents, or fewer accidents involving serious physical injuries or deaths (that’s the hope anyway), Level 5 vehicle accidents may involve much higher auto-repair costs than accidents involving human-driven vehicles, because of the expense of repairing high-tech sensors as well as computer hardware and software.
If an automaker enterprise liability regime were adopted, there would be no need for either the existing automaker liability laws (i.e., products liability as applied to automobiles), driver liability laws, or state auto no-fault laws. All of those auto tort regimes would be replaced by a single comprehensive automaker enterprise liability regime.
Further, if a motor-vehicle crash were to involve two or more vehicles made by different auto manufacturers, the enterprise liability regime would handle the accident as follows: First, the victims would simply file claims for their covered economic losses, naming the automakers of all of the vehicles involved in the accident. After a factual determination was made of whether in fact all of the named vehicles contributed in some way to the accident, the victims’ crash costs would be split between or among the automakers (or the auto insurers covering the losses for each automaker). The split among the automakers could either be equal (each vehicle manufacturer bearing its pro rata share of the crash costs) or according to any other reasonable allocation formula that the industry agrees upon.
One result of the adoption of a comprehensive automaker enterprise liability regime would be an increase in the apparent (and the experienced or internalized) price of most newly purchased automobiles, relative to vehicles purchased before the effective date of the enacting legislation.
This would happen because the cost of auto accidents that had been hidden in non-auto first-party insurance coverage prior to the enterprise liability regime would, with the adoption of the new system, be brought into the open through increases in automobile and auto-insurance prices. Because such a shift would be a significant change in the automotive marketplace, it would probably be prudent (and politically necessary) to institute a delayed effective date and/or an extended phase-in period over which the law would take effect.
The Theoretical Deterrence Benefits
Under a comprehensive automaker enterprise liability regime, because automakers would be responsible for all of the economic costs of auto accidents associated with their vehicles, they would be forced to internalize those costs. As a result, there would be beneficial deterrence consequences for automaker, and potentially driver, care and activity levels. This section explores those consequences.
First, automakers would have a strong legal and financial incentive to develop and implement cost-justified auto-safety innovations, whatever those might be. That is, if an automaker determined that there was some new brake design (such as a new computer-assisted automatic braking system) or some new guided cruise control mechanism that would reduce overall accident costs relative to its costs of development and implementation, then enterprise liability would reward them implementing those innovations, and punish them for not doing so. What’s more, there would be no inefficient incentive to stick with existing industry customs or consumer expectations if such customs or expectations were lagging behind proven safety innovations. Likewise, there would be no incentive to over-invest in safety features that are likely to impress a court or jury in a negligence-based lawsuit (such as a design defect lawsuit) but that, in actuality, provide less additional accident-risk reduction than they cost to produce.
Second, enterprise liability would force the price of automobiles to reflect the full-expected costs of auto accidents. That cost-internalization, in turn, could result in a scale of automotive manufacturing and sales that would be closer to the social optimum than is currently the case, as drivers would—in deciding whether to purchase a vehicle—be more likely to take into account something closer to the full social costs of that decision. In other words, auto enterprise liability could push us in the direction of optimal manufacturer activity levels: the optimal number of vehicles being sold. If that were to happen, it would be a clear improvement—in terms of overall efficiency—over the existing negligence-based automaker liability regime.
It is worth pausing here to emphasize the potential effects of a comprehensive automaker enterprise liability regime on the development of and transition to Level 5 vehicles. Because it to would be a comprehensive regime, it would apply to both driverless and human-driven vehicles. Assuming automakers expect Level 5s to bring a dramatic reduction in expected accident costs relative to human-driven vehicles, then Level 5s, when they eventually are available for sale to consumers, would have a substantially lower enterprise liability “tax” relative to human-driven vehicles made and produced after the new regime is adopted, since the human-drive vehicles would have much higher expected accident costs.
As a result, there would be a natural enterprise liability subsidy in favor of the production of Level 5 vehicles; and this subsidy, in effect, would be funded by a relatively high enterprise liability tax on human-driven vehicles, again, assuming such vehicles are not nearly as safe as Level 5s. Thus, the adoption of a comprehensive automaker liability regime would, under present assumptions, strongly incentivize and reward auto manufacturers to proceed, as quickly as is feasible, with the development and distribution of Level 5 vehicles. By contrast, if a special liability regime were adopted just for Level 5s, that increased their potential accident liability relative to human-driven vehicles, there would be a disincentive to move to Level 5s in the absence of a separate subsidy regime, perhaps funded by federal income taxes.
There are efficiency reasons to prefer a Level 5 vehicle subsidy that is funded through an enterprise liability tax on auto sales, with the amount of the cross-subsidy depending on the relative risk of vehicles (and drivers), over a subsidy funded by federal income taxes. The main advantage has to do with information. Under the direct subsidy, the regulator—or whatever government body would be asked to determine the amount and structure of the subsidy—would have to determine which particular safety technologies to subsidize and which not to subsidize and how much the subsidy should be. This would require an enormous amount of information and expertise that is not within the government’s comparative advantage relative to the auto industry. By contrast, under the subsidy structure inherent in a comprehensive enterprise liability regime, it is the auto industry who would calculate the appropriate amount of the subsidy ex ante, based on their educated guesses about (a) the amount of costs to be imposed on them under the regime for accidents involving human-driven vehicles, (b) the amount of costs that would be imposed on them if they make the investment necessary to develop and implement Level 5 vehicles, and (c) the R&D, design, manufacturing, marketing, training, and other costs that would be necessary to get Level 5s fully up and running.
If an enterprise liability regime is likely to have deterrence benefits on the automaker side, what about its deterrence effects on driver behavior? How an auto-enterprise liability regime would affect the driving behavior of human drivers is of course an especially important question, given that, with non-Level 5 vehicles, human drivers make most of the important operational decisions. In fact, enterprise liability could actually help with driver care and activity levels in a number of ways. First, enterprise liability would create strong legal and financial incentives for automakers to develop and adopt the most cost-effective ways of warning drivers about crash risks and of instructing drivers about how best to avoid certain types of accidents.
This effect flows from the fact that enterprise liability makes automakers’ responsible for all the economic costs of their vehicles’ accidents: If an automaker could actually reduce the frequency or severity of accidents in its vehicles by altering the wording, design, or placement of warnings or instructions, it would have an incentive to do so. On the other hand, if some new or revised warning would be more likely to confuse or annoy drivers than to educate them, the automaker would be incentivized under enterprise liability not to add that sort of unhelpful warning—even if it would have gotten the automaker “off the hook” under a more traditional negligence-based warning-defect standard. Automakers would do whatever works best to reduce accident costs, which would redound to their benefit as reduced auto-accident claim payouts over time.
In addition, enterprise liability could incentivize automakers to restructure the ways that automobiles are insured and sold in order to improve driver care and activity levels. First, consider how an enterprise liability regime might affect how auto insurance is provided. Note that under an enterprise liability regime automakers would have an incentive to shift contractually much of the expected costs of auto accidents to auto insurers. This somewhat counterintuitive result flows from the fact that auto insurers’ have a comparative advantage with respect to monitoring and regulating driver care- and activity-levels. If automakers could get auto insurers to take on somewhat more of the risk of auto accidents, the insurers would have a strong incentive to help drivers reduce expected accident costs. That is, because of competition for customers in the insurance industry, auto insurers would be incentivized to use the tools at their disposal—including individualized, driving-behaviorally-sensitive, risk-adjusted insurance premiums—in ways that would tend to encourage better driving habits and perhaps less driving, especially by high risk drivers.
What does this mean for how auto insurance would be sold? Auto insurance under an enterprise liability regime might be sold in the same way that it is today. An individual auto purchaser, in other words, might pay the automaker one price for the vehicle itself and then purchase a separate auto insurance policy at the same time from a separate auto insurance company. However, given that automakers would be ultimately responsible legally (through the doctrine of subrogation) for the auto-accident losses paid by the auto insurers, there would be strong incentives for contractual coordination between automakers and auto insurers. Individual auto manufacturers might even be induced to partner with particular auto insurers in an effort to offer the best, most competitively priced, combined product of vehicle and vehicle-insurance coverage.
Another way that enterprise liability could improve driver care and activity levels is through its effect on how automobiles are sold. For example, the introduction of an enterprise liability regime might push the automotive industry in the direction of lease transactions rather than outright sales. This is because leasing would make it easier for automakers to enforce the terms of the auto insurance policies, which again might be sold by an insurer who was contractually partnered with the automaker. Under a lease arrangement, for example, if a driver became uninsurable (because of bad driving behavior and/or increased claim payouts), or if the driver simply stopped paying her premiums, there might be a provision in the lease empowering the automaker to reclaim the vehicle.
In addition to favoring leasehold arrangements, the introduction of enterprise liability might create market pressure on auto manufacturers to sell vehicles to commercial purchasers rather than individual consumers. That is, automakers under enterprise liability might be incentivized to sell to commercial entities—fleet operators—who would agree contractually to indemnify the manufacturer for any enterprise liability payments made to victims harmed by vehicles in their fleets. These commercial purchasers, in turn, would either lease the vehicles to individual drivers or perhaps make them available through ride-share arrangements. Automakers in turn could be incentivized to choose commercial purchasers who are financially responsible and would be incentivized to purchase efficient auto insurance contracts to cover the enterprise liability payouts. Such a trend toward commercial fleets would be consistent with already existing market trends towards ride-sharing companies, which trends are expected to accelerate with the advent of Level 5 vehicles.
I am not suggesting that comprehensive automaker enterprise liability would necessarily result in auto lease arrangements replacing individual sales, or ride sharing replacing driving. Rather, the point is that, once automakers are made legally responsible for the cost of auto accidents (or for most of those costs), they will have an incentive (and the ability) to structure automobile distribution markets in ways that are closer the social optimal.
IV. Caveats, Concerns, and Conclusions
The description I have given here of an automaker enterprise liability regime is necessarily only a rough outline of an idea, a jumping off point for further discussion. The actual design of such a program would require empirical research into a range of topics, including whether shifting to enterprise liability would actually, and not just theoretically, produce substantial deterrence benefits. Among the other questions that would need to be answered include the following:
Under any real-world version of an automaker enterprise liability regime, there is the question of how long the automakers’ responsibility for insuring their vehicles would remain in effect. Would it be for the useful life of the vehicle or for some set period of time, say, ten years? If for some set period of time, who then would be responsible for covering the accidents arising out of the use of the vehicle? Also, what would the precise relationship be between an automaker enterprise liability regime and state mandatory insurance/financial responsibility laws? Presumably, rescission of coverage by the insurer due to excessive accident experience or failure to pay premiums would result in a suspension of driving privileges, but how would that be enforced? All good questions.
Similarly, if an auto enterprise liability regime were adopted, would it in fact have a grandfather provision perhaps exempting all vehicles manufactured and sold before a given date, as suggested above? Or would older vehicles made before the new law goes into effect be transitioned into the new regime over time? If older vehicles were fully exempted from (or grandfathered out of) the new regime, how would we deal with the resulting, potentially large, price differential between new vehicles (which would be priced with full accident costs internalized into the purchase price) and used vehicles (which would not be)? What role could increased mandatory minimum levels of auto insurance play in assisting with that transition?
There is also a whole range of question regarding how an automaker enterprise liability regime would deal with the threat of auto crashes (or stolen or destroyed data) resulting from criminal hacking of a connected system. Existing and growing markets in cyber insurance coverage might be able to handle the risks of posed to data stored in the vehicles, but the market may have more difficulty covering cyber risks to life, limb, and property.
Solutions range from expanding the role of the federal government as a reinsurer of last resort to limiting liability for cyber-related physical risks to the amount of mandatory liability insurance coverage. All of these details, and many others, would need to be addressed before any comprehensive automaker enterprise liability regime could seriously be considered.
The final concern raised by the idea of an automaker enterprise liability regime involves the cost. The concern is not that the “experienced” price of autos would rise, although that would certainly be true in the short run. As already noted, such a price increase would be the source of much of the deterrence benefit of an enterprise liability regime, the mechanism through which deterrence would work, incentives for accident-avoidance optimized. Rather, the concern has to do with the problem of affordability. For some households, owning an automobile is already unaffordable, which is a source of hardship and an obstacle to social mobility. For those households, a program that raised the price of autos, even in an effort to make them safer, may not be a welcome change without some form of compensating subsidy. My own view is that some type of taxpayer funded transportation subsidies for the low-income drivers may indeed be desirable (from a social justice perspective), whether or not an automaker enterprise liability regime were adopted. But that topic too must await another day.
† Douglas A. Kahn Collegiate Professor of Law, University of Michigan Law School. Professor Logue received helpful suggestions on the ideas in this Article from numerous participants at a conference on Traffic Accident Liability and the Future of Autonomous Vehicles held at Wake Forest University School of Law and from his Michigan Law colleagues at a Fawley Lunch Workshop in Ann Arbor. Thanks also to Bryant Walker Smith for his comments and notes.