Asymmetrical Information - Megan McArdle

12.28.12

Should People Be Forced to Buy Liability Insurance for their Guns?

The latest gun-control idea is forcing owners to buy liability insurance. That may help a few victims, but it won't stop crime, writes Megan McArdle.

Novel gun control ideas continue to percolate through the commentariat.  The latest idea is requiring liability insurance for gun owners, which seems to have first been suggested by John Wasik blogging at Forbes.  Reihan Salam, one of my favorite thinkers, says it's an idea seriously worth considering.  I too have been mulling this since it started making the rounds, mostly because I've been spending a fair amount of time thinking about insurance for the book I'm writing.  In the end, I think it might be a fine idea to help a small number of people, but it wouldn't do what proponents are imagining in terms of controlling criminal behavior.  Mostly, it would be a way to compensate some victims of gun accidents. Below, I elaborate the reasons why I think this is the case.

The first question we have to answer is why we want to require the insurance.  There are three reasons I can think of:  

1) it will simply raise the cost of owning guns to the point where people aren't willing to do it.

2) It will pay for the harm caused by guns  

3) It will make insurers into de-facto regulators.  

Number one is unfair to advocates of stronger gun control, most of whom say that they do not want to take all guns away from law abiding citizens. I see no reason to doubt them, and so I'm basically discounting any interpretation of this proposal that seems like it would just raise the cost of guns until they were unaffordable for all but the very wealthy. 

Number two seems worthy, but unlikely to have a very large effect.  The majority of gun deaths are suicides, and it's hard to see to whom the insurance would pay out--there's a reason that life insurance restricts suicide payouts, and presumably, any gun liability policy would have at least the same restrictions.  (You could theorize that we would at least make it more expensive to commit suicide, and thereby hopefully reduce the suicide rate, but it's hard to believe that the added cost of a liability policy would substantially deter someone bent on self-harm.  The Brady waiting periods did reduce the rate of firearm suicides in people over the age of 55, but not the overall homicide or suicide rates.)

The second largest subset of gun deaths and injuries are deliberately inflicted on another person; along with suicide, this accounts for all but a handful of annual gun deaths.   In the case of homicide/assault with a deadly weapon, however, we're talking about a lot of shooters who cannot legally own their guns now, either because they are too young, because they are felons, or because they live in a city which has historically made it very difficult to own handguns.  Those people are not going to acquire liability insurance just because you pass a law saying they have to, and given that they are also probably not going to register their guns, there's no way to force them to do so.  Moreover, insurance usually excludes criminal acts committed by the policyholder, because of course, there's a huge adverse selection problem.

Which leaves accidents.  Accidental death and injury rate from guns is fairly low, compared to both other gun incidents, and other categories of accident: 14,000 injuries and 600 deaths in 2011.  This sounds like a lot, but in a population of 300 million, a lot of people die each year from almost anything: dozens of kids a year drown in buckets. The rate of accidental firearm death or injury is much lower than something like drowning, much less a really common cause like motor vehicle accidents or medical mistakes.  And the damage is already often covered by other forms of insurance.  

There would be some benefit to requiring insurance, but overall, we're talking about helping a pretty small number of people compared to the status quo.  There might be some kind of justice argument--shift the cost to gun owners rather than your and my health and homeowner's insurance--but we're talking about pennies a year.  It might be symbolically meaningful, but probably not financially.  

That leaves making the insurers into quasi-regulators.  The idea seems to be that the insurers will be able to do all sorts of things that the government won't.  If the law won't keep dangerous people from getting guns, or make you keep them under lock and key, maybe Traverlers can do it for them.

Problem Number One: The Insurance Laws Are Highly Political

Let's assume that this does not founder on a disparate impact challenge, because I Am Not A Lawyer, and I can't really speak to the relevant law.  I do think that it's likely that the law is going to face challenges if it sufficiently restricts the ability of any large identifiable group to get a gun (except, obviously, for groups that are already not legally allowed to own guns, like felons and minors).  But I don't know enough about the law to say whether those challenges will succeed.

I will, however, note that hopes of getting the insurance market to do something that the government finds politically unpalatable often end with the government intervening to stop insurers from doing that very thing: see flood insurance for people who build houses on flood plains, HMOs, and so forth.  If you can't get the government to do it directly, the indirect method is going to face the same political pressures.

Problem Number Two: Criminals Don't Buy Insurance

Most gun homicides are committed using handguns, and a high percentage of those crimes are committed by young men, often poor men with criminal records and connections to the drug trade.

In many cities, where gun violence tends to be concentrated, it is pretty difficult to get a handgun permit unless you're friends with the chief of police.  Moreover, you often have to be 21 to get one, and felons are forbidden to have them no matter how old they are.  It's hard to see how an insurance requirement will stop people who are already willing to break the law, so it's not clear what we achieve by making it really, really expensive to procure the gun insurance they are not going to buy.   

And even if you got them to buy it, how do you get them to keep paying their insurance premium? One month of even very expensive insurance is not such a big barrier when the gun itself costs hundreds of dollars.  Envision the set of policies that would be necessary to ensure that the population of young, asset-poor people with black market connections who you are trying to target actually pay their insurance premiums every month. It's breathtaking: gun registration, frequent inspections, an insurance regulator empowered to seize any money from your bank account. And just how many young drug dealers even have bank accounts, or paychecks to garnish?

One in seven drivers in America is uninsured.  That's despite the fact that they are driving a large, hard-to-conceal object which is regularly inspected by the fleet of parking and traffic enforcement professionals hired specifically by governments for this purpose.

Most places don't even have gun registration laws--not because no one's thought of it, but because they're really difficult to get through the legislature. But even if they did, they'd be very hard to enforce.  A car is prominently visible on public roads and streets.  A gun is not.  

One way you might sidestep these problems is by requiring proof of insurance to buy ammunition--but you'd run into the "straw purchaser" problem even more than with guns.  Someone who comes in to buy fifteen handguns reasonably gets the fisheye.  Someone who comes in to buy fifteen boxes of ammunition could just like to buy in bulk; it doesn't take that long to go through a box of cartridges at the range.  

Problem Number Three: Non-Criminals Aren't Usually Held Liable for Criminal Activity by Others

Wasik suggests a way around the issue of illegal guns for which no insurance is purchased: 

What about “straw purchasing” where someone buys a gun or gives it to someone else? The original purchaser not only would be required to have insurance, but would be liable for any violence committed with the weapons they purchased. The insurance companies could keep these records, which they are really good at doing. How do I know this might work? 

Insurers have been doing this for centuries in underwriting health, auto, home and life insurance. Instead of charging the highest premiums for overweight smokers, alcoholics with bad driving records and dangerous hobbies, the most expensive policies will be priced for those who are younger with histories of mental illness, divorce, criminal records or severe financial difficulties.  

This is a little confusing in the context of a post on insurance requirements, because of course, insurance companies don't hold you liable, the law does.  Insurers just write policies on your estimated liability.  He's effectively advocating an enormous change in the liability law to make people responsible for what happens with their property after they have sold it, lost it, or had it stolen.  

While I understand that there is some liability if you carelessly make it easy for criminals to use your property to bad ends, expanding liability the way that he suggests would be pretty novel.  Imagine if you could get sued for a drunk driving death caused by the guy who bought your old car from the guy you sold it to.  Or the joy-riding teens who carjacked your SUV.  The trial lawyers would love it, of course, but even with their campaign contributions flowing like water, I think you'd face some heavy political opposition, and some heavier trouble with the appellate court.  And you'd face some truly epic problems getting insurers to insure it in the way that I think the author is envisioning.  

What's the problem? I hear you cry.  Insurance companies write liability policies all the time!  Indeed they do.  But not necessarily policies like the one I think he's proposing. There are basically two ways that the law could handle the liability.  The standard way wouldn't control crime.  And the way I think he's proposing (it's not quite clear) would probably destroy the insurance market he says he wants to create.  

The standard way to handle liability is that as long as you're paying for gun insurance, your insurer is liable for any claims against you (or, perhaps, for claims that originate from actions undertaken while the policy is active).  When you stop paying, the insurer stops being liable. From that day forward, you, or your new insurer, is liable for any damages.

This is a quite workable (indeed, it works all the time), but there's a problem: it seems like it doesn't do much about straw purchasers.  They can buy whatever insurance they need to get the gun, and then let it lapse.  The insurer doesn't care, because hey, they're not liable; the insurer bases their premiums on the damages they're likely to pay, not whether the purchaser is likely to be a bad person who buys guns for known felons.  You've gained a workable insurance rule, but now the whole point of the insurance--to make it cost-prohibitive for likely criminals to get guns--has been disastrously impaired.  

Of course, the straw purchaser still has liability, but the straw purchaser is likely to be what's known in the legal biz as "judgement proof"--which is why you probably carry insurance against having an accident with an uninsured motorist.  The sort of people who do not pay for insurance also tend to be the sort of people who lack assets worth seizing, or paychecks worth garnishing, which is why families rarely bother to bring civil suits against criminals.  

And that's assuming that you win the game of "prove the gun wasn't lost or stolen".  As I understand it, in that sport, the defendant has an enormous built-in advantage.

Problem Number Four:  Insurance Often Excludes Criminal Behavior by the Policyholder  

Even if you could prove it, however, the liability insurance wouldn't necessarily pay.  Criminal behavior is increasingly explicitly excluded from liability policies.  That's what makes it possible for those policies to be issued at an affordable price--and also, makes them less-than-useful for controlling crime.  Since most of the uses we're concerned with are criminal, this further decreases the usefulness of liability insurance as a way to reduce gun deaths, unless we actually mandate that insurers cover criminal liability.  We'd also have to make it mandatorily renewable with heavy rate review, because otherwise, insurers could develop inexpensive short-term policies that are hard to get renewed at an affordable cost. 

If we did this, the policy costs for likely criminals would go up--yay!  But there's a little problem: while you've increased the cost of being a potential criminal, you've just decreased the cost of actually committing a crime.  Probably not a lot, because as I mentioned, felons and people willing to buy guns for felons are likely to be judgement proof.  Nonetheless, I'd want a lot of solid econometric evidence that benefits of the former outweigh the costs of the latter.  Moral hazard is never desireable, but in the case of homicide, it's horrible indeed.  

Problem Number Five: Holding Original Insurers Liable Might Destroy the Insurance Market

There is a way to force the insurance companies to care, of course:  have this new, effectively unlimited liability accrue to the insurer at the moment of purchase.  This is what I think Wasik has in mind.

That would create quite a good incentive for insurers to prevent the wrong people from buying guns--perhaps too good.  This is the way that courts decided to handle asbestos claims in the 1980s.  And what they did was not limit asbestos insurance to "responsible asbestos owners", but destroy the market for insurance.

Those of you who recall the great implosion of Lloyd's of London in the early 1990s may remember that the heart of the financial problems was a 1980s court ruling holding that insurers were liable for asbestos damages on any policy written between the time of exposure and the time (usually decades later) when the disease manifested.  According to Adam Raphael, author of the best book on the Lloyd's disaster, they did so precisely because otherwise, there would have been no one for asbestos victims to sue: the companies were bankrupt, or nearly so, and the insurers who they approached to write them liability insurance were responding with quotes along the lines of "All the money in the world, plus a box of chocolates and a weekend for two in Puerto Rico."

But the courts sided with an expansive liability interpretation! you will say, and so they did.  Courts were more sympathetic to this sort of thing in the 1970s and 1980s, but leave that aside. Because the important point is what those rulings did not do: create a market for asbestos liability insurance.  That's precisely why they had to go after old insurers, who as Raphael notes, suddenly "faced huge liabilities on policies issued up to half a century ago, for which very small premiums had been charged and of which no proper records existed.”  Previous rulings, which had radically expanded a manufacturer's liability for even known risks of their product, had destroyed the market to insure these companies; now this destroyed the market for reinsurance, except from the most gullible and idiotic of the Lloyd's syndicates.  Eventually they ran out of gullible idiots, and Lloyd's Names had to write enormous, scary checks which bankrupted many of them. Insurers do not like open-ended committments for risks that cannot be readily quantified.  

All of which is to say that point-of-purchase insurance would probably be very expensive even for boring, staid middle-class people with sterling criminal histories, if it were available at all.  Which it might well not be.  

Problem Number Six: A Ban by Any Other Name is Still Just as Difficult to Achieve

Of course, for some folks, that's may be a feature, not a bug; it would amount to a defacto ban on guns, or at least, a defacto ban on everything but bolt-action rifles and maybe some revolvers and shotguns.  Very rich people who are unlikely to shoot anyone could own a few collector items, and the rest of us would have to do without, or stump up $5k a year for gun insurance.

But as I wrote last week, you cannot use semantic games to do an end run around an enumerated constitutional right.  The Supreme Court ruled in Heller that you cannot ban a large class of weapons such as handguns.  If you come back and say, "We're not banning them, your honor, we're just expanding the liability law and requiring proper insurance," they are not obligated to go along with your charade.  If you passed a law giving the New York Times $2.5 million worth of liability for every typo, it would not survive in the courts no matter how vociferously you insisted that this wasn't about censorship, but responsibility.  

If your insurance scheme makes it functionally impossible for many people who are legally entitled to own guns to actually buy one, you risk running into the "emanations and penumbras" of Heller.  The better the law works to keep guns out of the hands of lots of citizens, the more likely it is to be struck down.

Problem Number Seven: Liability and Insurance Law is Mostly Handled By the States

The Economist might be forgiven for not remembering this, but American writers have also ignored this aspect.  While I don't know that it's impossible to pass a federal liability law on this stuff--the commerce clause confers very broad powers--it does seem fairly unlikely; most of these suits are going to involve shooters and victims from the same state.  So even if this gains wide support, it will probably only pass in some states--you can look on a map and guess which ones. Which is exactly what gun control advocates claim makes current urban gun control laws useless.  

Problem Number Eight: Mass Shooters Won't Be Deterred  

Of course, this might be a fine law even if it just deterred regular homicide and left the mass shooters alone, so its effect on rampage shootings isn't exactly an objection.  But given that the events at Newtown started this discussion, I feel that this should be addressed.  James Alan Fox, a criminologist who studies mass shootings, has debunked a lot of the myths of mass shooters.  The two things he says that are relevant here are, first, that it's not as easy as people think to identify potential shooters.   Most mass shooters do not have criminal records or histories as a mental patient, and the "warning signs", like social isolation and a tendency to blame others, are both pretty common and pretty hard for the government or your insurer to detect.  His second relevant point is that mass shooters are very, very determined to get the guns they use, planning their attacks for months or years and carefully amassing their arsenal.  Short of a ban and confiscation of most of the guns in the US, they will steal, borrow, or buy them however they need to.  An insurance requirement is a trivial obstacle compared to the others they generally overcome in order to execute their deadly plans.  As I say, that doesn't necessarily constitute and objection to such a law, but we should be realistic about what we plan to accomplish.  

Problem Number Nine: Liability Insurance is Usually Required for Public, Not Private, Uses  

Contrary to popular belief, you don't have to have a license and insurance to have a car; just to drive it on public roads.  Nor do you have to have homeowner's insurance to own a home, just to obtain a mortgage.  This would be an expansion of the way we usually handle insurance requirements.  

That doesn't mean it wouldn't pass legal muster--but that the way people are thinking of this (just like a car!) doesn't actually work.  Moreover, if there are legal challenges, these requirements will face heavier, not lighter scrutiny, because driving is not a constitutional right.

Liability insurance might provide some level of damages to some people who are accidentally injured, while protecting the assets of the occasional affluent gun owner who inadvertently shoots someone.  I don't see a particular problem with requiring it for people who want to take their guns out in public, though to be sure, the Supreme Court still might.  But the fact that the stuff you can buy from the NRA costs so little seems to indicate that insurance would not be paying a lot of money to a lot of people.  Before I offer my full throated support, I'd want to know how many people we're actually going to help, and how much it will cost us to set up the bureaucracy to enforce the insurance requirements.

But whether or not it's a good idea to help the victims of gun accidents, I just don't see how it's going to do much of anything to tackle the problem that proponents actually want to solve.  They're hoping to fix, not the problem of uninsured accidents, but our criminal gun problem--the folks who already aren't allowed to have guns, yet do a lot of the shooting at other people.  

The legal changes needed to use insurance to make a dent in criminal possession and use--which so often go together--would be enormous, far reaching, and subject to gimlet-eyed review by appellate court.  And the very political forces that you are trying to end run would rise up and obstruct at every turn. To put it another way: if you could get support for widespread gun registration, you probably wouldn't bother thinking up ways to use insurers as substitute regulators.

Of course, proponents might say that it doesn't have to be a full solution, only a partial solution. And fair enough.  The problem is, it's not clear to me that any law which could actually be enacted would even a partial solution to gun crime.  The people who will buy insurance will, by and large, be the people who have assets and social respect to lose by breaking the law . . . which is precisely why they're quite unlikely to commit a gun crime.  The people who are most likely to use the guns to a bad end will simply do without.