BY ROBERT W. PETERSON, PROFESSOR, SANTA CLARA LAW

NEW TECHNOLOGY OLD LAW

Autonomous or self-driving vehicles have long been a fantasy. They cruised through Woody Allen’s 1973 movie, Sleeper. Not surprisingly, California, the cradle of technological innovation, is moving the fantasy toward reality. Google, one of the primary developers of autonomous vehicles, is located in California.

When faced with insuring autonomous vehicles, however, California may be locked in old technology—something like working with a 1985 Mac. Despite Woody Allen’s film, the drafters of Proposition 103 (adopted by the voters in 1988) embedded in California a regulatory system ill suited to insuring self-driving automobiles. Among other things, the proposition moved California into the group of states that regulate and require prior approval of all automobile insurance rates. Had it done only this, insuring autonomous vehicles would present only modest challenges.

Proposition 103, however, did much more. It entrenched in California insurance law a number of requirements that are incompatible with a rapidly advancing technology like self-driving vehicles. The proposition mandates the use of rating factors, which determine a vehicle owner’s premium, that make little sense when applied to self-driving vehicles. For example, Proposition 103 mandates that two of the three most heavily weighted factors for determining a policy holder’s premiums must be the driver’s safety record and number of years behind the wheel. Since the role of the driver diminishes and, perhaps,vanishes with self-driving vehicles, it makes little sense to base premiums principally on one’s driving record and years of experience.

The proposition also mandates a 20 percent rate discount for people who qualify as “good drivers.” The good driver discount is based on the driver’s moving violations and “principally at-fault” accidents. Again, this mandated discount, which must be balanced by charging more to other drivers who do not qualify, presents serious issues when applied to vehicles that drive themselves.

In addition, Proposition 103 does not permit the facile downward adjustment of rates as rapidly changing technology reduces the risks presented by autonomous vehicles. Unlike car sellers, insurers must charge all policy holders the sticker price— that is, the rate approved by the Department of Insurance. Even if the safety of automobiles rises swiftly, as one may expect with rapidly improving technology, insurers may not be able to reflect these improvements in their rates without filing a complete rate application. Rate applications are expensive and timeconsuming propositions. Making it more difficult than it needs to be to lower rates is not in the best interest of consumers.

With respect to liability issues, policy makers (legislatures, courts, insurance departments) will likely face two choices. Under present law, an insurance policy covers only damages for which the insured is liable. Liability usually turns on the fault of the driver. It is unlikely a driver will be at fault when a selfdriving vehicle causes damage.

Even though self-driving vehicles are likely to be much safer than humandriven cars, consumers may well bridle at being held liable without fault for the misbehavior of their automobile.

If those injured are to be protected, policy makers must initially impose liability without fault either on the operator (the person who initially sets the self-driving car in motion?), or on the manufacturer on the basis that the vehicle failed to behave as it should have if a driver had been behind the wheel. Even though self-driving vehicles are likely to be much safer than human-driven cars, consumers may well bridle at being held liable without fault for the misbehavior of their automobile. This might suggest moving the initial liability to the manufacturer. Vehicles, however, are made to last. By the time of injury, manufacturers may be remote, difficult to sue, or bankrupt. This undermines the public policy that requires all drivers to either carry insurance or prove financial responsibility.

To the extent that liability, and the accompanying insurance coverage, moves to the products-liability arena, the provisions of Proposition 103 that relate to automobile policies will not apply. Manufacturers, if they choose to insure, use commercial policies outside the ambit of the proposition. Moving the primary source of compensation for injured parties to suppliers, manufacturers, and their insurers, however, presents coverage issues for innovative companies acquired by others. Often the coverage under a predecessor’s policy will not move to the acquiring entity, even though the liability for a pre-acquisition injury may.

To some extent, moving coverage to manufacturers also exacerbates problems of moral hazard and adverse selection. Policy holders’ rates are based on a number of rating factors (19 in California), including the number of miles driven annually, the use (pleasure, commuting, commercial) to which the car is put, and the location of the vehicle (territory). Manufacturers have no control over many rating factors, nor do they have a convenient way to apply them. Consequently, they will simply pass to consumers the average liability cost presented by each model in their fleet of vehicles. Thus, those who drive little will pay too much; those who drive much will pay too little. Those who drive for pleasure will pay too much; those who commute or use the vehicle commercially will pay too little. Those who drive in rural areas will pay too much; those who drive in urban areas will pay too little. It is difficult to justify these cross-subsidies, and some will simply encourage overuse of the vehicle. Since insurance, like fuel, is a cost of owning a car, this may also encourage, for example, low-mileage or rural drivers to purchase more accurately rated, ordinary vehicles.

If automobile insurers, rather than manufacturers, are the first line of compensation for injuries caused by defects in autonomous cars driven by faultless vehicle owners, insurers will pass the costs to the manufacturers. The manufacturers will then pass their insurance premiums back to autonomous-vehicle buyers in the cost of the car. Since insurers of manufacturers are not constrained by the unique rating factors mandated by Proposition 103, applying it to the insurers of self-driving automobiles would be a costly and fruitless exercise.

These challenges would matter little if Proposition 103 were easily adjusted to meet this new technology. It is not. Unlike the 1985 Mac, one cannot simply order a new model. Although adopted by fewer than 51 percent of the voters, Proposition 103 may be amended only by another proposition or by a two-thirds vote of the legislature, and in the latter case only when the legislation furthers the proposition’s purposes— whatever that may prove to mean.

Santa Clara Law Professor Robert Peterson, director of Santa Clara Law’s Center for Insurance Law and Regulation, is an expert in insurance law. He has taught at Santa Clara Law since 1970. He earned his law degree from Stanford University, he holds a Diploma in Law from Oxford University, and he clerked for United States District Court Judge Robert F. Peckham.