In theory this just shifts the insurance coverage from the driver to the manufacturer. The real unknown is if any insurance company will cover the manufacturer or not. I suspect that like the airline industry there will need to be a legislated cap on damages to make this work. Provided that there is insurance then there should not be any issue.

More fundamentally we should not assume that the people working on this at Google are idiots. They already know all of this and I am sure they are working with insurance companies and governments to solve this problem. Compared to the technical difficulty of making a reliable and safe autonomous vehicle this is an easy problem.