B.C. government’s ‘luxury car’ solution won’t solve the problem

Todd Stone, B.C.’s minister of transportation and infrastructure, hit the news recently with his announcement that ICBC, the provincial Crown corporation that provide auto insurance, will stop basic insurance for high-end luxury cars worth more than $150,000.

This move appears to be an attempt to avoid sky-high repair bills. The recent repair bill for a 2015 McLaren 650S was more than $90,000 and fixing a Ferrari 458 Italia cost ICBC another $88,000. On average the $15,000 repair bill for a luxury car is roughly six times higher than the $2,500 for the typical car. More recently, Stone declared “we’re going to explore every option we can to try and restrain the costs.”

The problem has been growing and will continue to grow. ICBC insured 3,000 of these luxury vehicles this past year, a 30 per cent increase in three years. Further, the cost of repairs to luxury cars can be expected to climb because these repairs are labour-intensive and often require custom handcrafted parts.

The announcement identified a fundamental flaw in the current insurance arrangements. As Stone noted, “Right now whether a person drives a $15,000 Honda Civic, or a $300,000 Ferrari—the basic insurance premiums are similar… We want to be sure that the regular everyday driver is not paying for the additional repair costs of these cars through their insurance rate."

Basic insurance in B.C. consists of $200,000 third party liability and is mandatory for operating a car. It covers the damage that the McLarens and Ferraris cause to the Honda Civics and Toyota Corollas but it does not cover the damage to the luxury cars themselves.

Luxury cars can be damaged when their drivers are at fault. Then, the damage would not be covered under the driver’s basic insurance and would be covered only if the driver had optional comprehensive and collision coverage. In that case, ICBC takes account of the possibility of expensive repairs in the premium it charges for the coverage. The cost of this coverage depends on the make, model and year of the insured vehicle.

Expensive repairs really matter when the luxury car is hit by another driver. That driver, or ICBC on the driver’s behalf, becomes liable for and has to pay for the expensive repairs. In effect, luxury cars impose extra costs on other drivers in terms of higher premiums because it’s much cheaper for ICBC if drivers crash into a Honda rather than a Bugatti. To use economic jargon, an owner’s decision to purchase an ultra-expensive car imposes an externality on all other drivers in terms of the extra liability they have for repairs.

Denying basic coverage for these cars does nothing to avoid the costs of repairing expensive cars. Basic coverage pays for the damage a driver causes and not the damages that others cause to the driver’s car. ICBC will still be required to pay for the expensive damages whenever another driver is at fault.

Requiring luxury car owners to go to private insurers for basic coverage gives these insurers a free ride. They only have to pay for the damages that the drivers cause to everyday cars. ICBC is still on the hook for damages on luxury cars caused by other drivers.

Stone also raised the possibility of capping the amount it would pay for damages to luxury car owners when other drivers are at fault. This approach would certainly limit ICBC’s costs. Yet, ICBC has paid only a portion of the damages and may not have extinguished the other driver’s liability.

Fortunately the government has offered another, better solution in its proposed interim solution. This solution requires that “high-end luxury car owners… pay more than double for their basic insurance and ensure their premiums fully cover all costs of any repairs.” The resulting higher rates makes owners pay the costs of driving a luxury car that otherwise they would shift to others. Under this solution they face the consequences of the higher repair costs resulting from their decision to buy a high-end car.

The government’s long-term solution of denying basic coverage for luxury car owners will not solve the problem. The interim policy of charging these drivers more for their basic coverage is the right way to go.