Drivers, auto insurers clash with government officials over ‘crash taxes’

American motorists and auto insurers are fuming over so-called “crash taxes.”

A new poll commissioned by the Property Casualty Insurers Association of America found that 76 percent of American adults believe current taxes cover the time and services provided by emergency response providers following a traffic accident. As a result, they believe extra fees for accident response (also known as crash or accident taxes) that are being charged or proposed by cash-strapped local governments are not needed.

“There is strong public opposition across the country to this new trend of charging accident response fees,” Robert Passmore, senior director of personal lines for the Property Casualty Insurers Association of America, said in a statement.

Sacramento, Calif., recently became the latest American municipality to embrace the crash tax concept. On Jan. 25, 2011, the City Council narrowly passed an ordinance that charges out-of-town drivers a minimum of $495 whenever they’re involved in an auto accident requiring a response by firefighters. The ordinance is similar to hundreds like it that have been passed in at least 26 states during the past seven years.

Officials in Sacramento, Calif., recently enacted a “crash tax.”

Drivers and insurers alike are agitated by the crash tax trend.

“Not only is it bad public policy, it’s misleading and unfair to drivers,” says Sam Sorich, president of the Association of California Insurance Companies.

Proponents of accident response fees claim they’re an innovative way to help close municipal budget gaps without cutting services or raising taxes. Sacramento, for instance, says it hopes to generate between $300,000 and $500,000 each year from the new fees, while also helping avoid further cuts in the city’s Fire Department.

Crash taxes ‘unfair’ to policyholders, insurers

Insurance industry experts, however, are crying foul. Crash taxes, they say, are not only unfair to drivers, but also unfair to insurers. Industry leaders say the majority of auto insurers have not built this cost into their policies and, therefore, can’t afford to cover the expense.

“I tried to explain to the (Sacramento) City Council that if there’s an expectation insurance will pay for these response fees, that is a mistake,” Sorich says. “I don’t know of any insurance company making this a part of their auto policy. It’s the accident victim who winds up paying for the fire department’s time.”

Moreover, the Sacramento ordinance — like many others — makes no distinction for fault. In other words, if a driver from San Francisco is involved in an accident in Sacramento, it will be his responsibility to pay for the response fee, even if he wasn’t at fault in the accident.

“It’s unfortunate because policyholders are already paying for emergency response services through their taxes,” says Mary Bonelli, a senior vice president with the Ohio Insurance Institute. “No matter how it’s disguised, this is a form of double taxation.”

Bonelli points to the case of Mike (not his real name), a driver form Huron, Ohio. Several weeks after being involved in a minor auto accident, Mike received a bill for the two police officers who directed traffic, established a safety zone and made an arrest at the scene. For this, Mike owed $538 to the City of Huron.

The bill (as is most often the case) initially was sent to Mike’s auto insurance company. When the company refused to pay, however, the third-party billing vendor handling the case passed the invoice along to Mike.

“This puts the insurance company in a tight spot,” Sorich says. “We don’t want to have that kind of relationship with our customers, but the policy is the policy. If it’s determined this fee is not covered by the terms of the policy, you have to tell your customer he or she needs to pay it. That creates tension between the customer and the company, and we want to avoid that.”

In some cities, accident response fees can exceed $2,000.

Accident response fees ‘rightly unpopular’

The cost of these fees varies greatly across the country, ranging from $100 to more than $2,000, depending on the amount of services delivered. For instance, in Sacramento, a crash requiring an air ambulance for an injured motorist will run $2,275.

“We’ve taken a position that these fees are rightly unpopular. If taxes aren’t covering such basic emergency services, where is the money going?” says David Snyder, vice president and associate general counsel for the American Insurance Association. “We believe that emergency services in this country have evolved into a public good that’s paid for by municipal budgets, not by individual accident victims.”

With increasingly larger cities like Sacramento embracing crash taxes — and cities like New York weighing the option — it begs the question: Will this trend grow so much that auto insurance companies can’t help but figure these fees into their policies?

“I don’t think so,” says Michael Barry, a spokesman for the Insurance Information Institute. “While it seems like this is becoming a national trend, it’s still a very small percentage of municipalities that have taken this step. It’s still highly unusual.”

In fact, Alabama, Louisiana, Oklahoma, Florida, Arkansas, Georgia, Tennessee, Missouri, Pennsylvania and Indiana already ban the practice of accident fee billing. In 2011, bills that would prohibit municipalities from charging accident response fees have been introduced by lawmakers in Arizona, California and Michigan, according to the Property Casualty Insurers Association of America.

If crash taxes were to become the law of the land, Barry acknowledges that “premiums would eventually move northward.”

So, what should drivers do if they receive one of these “crash tax” bills in the mail?

“Just because you received a bill doesn’t necessarily mean you are mandated by law to pay it,” says Bonelli, the Ohio Insurance Institute executive. “Many ordinances are written as so-called soft billing ordinances. If you get one of these letters or bills, I would suggest you contact your municipality directly, get a copy of the ordinance and find out whether you are mandated to pay it or not.”

–Nick DiUlio