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No-Fault Auto Insurance
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THE TOPIC
OCTOBER 2008
The term "no-fault" auto insurance is often used loosely to denote any auto insurance program that allows policyholders to recover financial losses from their own insurance company, regardless of fault. But in its strictest form no-fault applies only to state laws that both provide for the payment of no-fault first-party benefits and restrict the right to sue, the so-called “limited tort” option. The first party (policyholder) benefit coverage is known as personal injury protection (PIP).
Under current no-fault laws, motorists may sue for severe injuries and for pain and suffering only if the case meets certain conditions. These conditions, known as a threshold, relate to the severity of injury. They may be expressed in verbal terms (a descriptive or verbal threshold) or in dollar amounts of medical bills, a monetary threshold. Some laws also include minimum requirements for the days of disability incurred as a result of the accident. Because high threshold no-fault systems restrict litigation, they tend to reduce costs and delays in paying claims. Verbal thresholds eliminate the incentive to inflate claims that may exist when there is a dollar "target" for medical expenses. However, in some states the verbal threshold has been eroded over time by broad judicial interpretation of the verbal threshold language, and PIP coverage has become the target of abuse and fraud by dishonest doctors and clinics that bill for unnecessary and expensive medical procedures, pushing up costs.
Currently 12 states and Puerto Rico have no-fault auto insurance laws. Florida, Michigan, New Jersey, New York and Pennsylvania have verbal thresholds. The other seven states—Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota and Utah—use a monetary threshold. Three states have a "choice" no-fault law. In New Jersey, Pennsylvania and Kentucky, motorists may reject the lawsuit threshold and retain the right to sue for any auto-related injury.
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RECENT DEVELOPMENTS
States
- Minnesota: A study by the Insurance Research Council (IRC) of the state’s no-fault system, using data from 500 personal injury protection (PIP) insurance claims settled in 2007, found that 58 percent of all medical care provider charges for treatment of no-fault auto insurance claimants were from chiropractors, compared with 11 percent for physical therapists and 19 percent for physicians (general practitioners, ER physicians and orthopedists combined). The 22 auto insurance companies participating in the study represented 61 percent of the Minnesota auto insurance market.
- The growing cost is mostly due to the rapid rise in fees. While the number of auto insurance claimants obtaining chiropractic treatment increased 5 percent over the five year period 2002 to 2007, the average charge rose 30 percent from $122 to $158 per visit. Minnesota had the third-highest chiropractor utilization rate (42 percent) among the 17 states in the study, those with either with a true no-fault or the add-on system, see chart below for a list of states in these categories. Only Washington (add-on) and Florida had higher rates. Utilization of and charges for MRIs also grew during the period.
- Colorado: Colorado repealed its no-fault law in 2003, but critics of the repeal have been working to reinstate some form of first-party medical coverage ever since. Legislation was signed into law in June 2008, which would add an optional $5,000 in coverage to auto insurance policies for medical payments. Critics argued that emergency care providers, such as trauma centers, are suffering financially under the current tort-based system, under which medical bills are paid by health insurers. In September 2008 there was an attempt to reinstate no-fault but it failed to garner support in committee.
- The root of the problem lies in the difference between reimbursement rates set by the no-fault auto insurance law and those negotiated by health insurers. No-fault insurers paid the bills in full whereas health insurers, which deal with a much larger volume of cases, not just auto injury cases, can negotiate a significantly lower rate. Under S.B. 11, for the first 30 days emergency care providers are paid under a priority of payment schedule. Policyholders who do not want the coverage may reject it when they purchase auto insurance or when they renew their policy.
- An independent research group has found that Colorado drivers pay 35 percent less for auto insurance than they did before the state changed its auto insurance system nearly five years ago. Hospital reimbursements were down by $85 million, in part because they are treating fewer auto accident victims. In 2002 acute care hospitals admitted almost 6,000 people after auto accidents, compared with close to 4,500 in 2006, a drop of almost 1,500 people. In two-thirds of crashes there are no injuries and the majority of injuries that do occur are minor strains and sprains, according to insurance data.
- Florida: The state’s no-fault law expired on October 1, 2007 after lawmakers had failed to agree on how to reform the law. However, shortly after the expiration date, under pressure from the Governor, lawmakers reenacted the no-fault law which became effective in January 2008, with significant reforms designed to curb fraud. One provision limits the type of health care providers that can be reimbursed to help eliminate claims from fraudulent medical clinics. Payments for medical care under the personal injury protection (PIP) part of the policy can only be made when provided, ordered or prescribed by authorized medical care providers. The legislation also sets limits on fees for medical care provided under the law. Hospitals feared that unreimbursed costs would soar under a tort system. About 40 percent of the patients treated at hospitals and trauma centers for injuries related to auto accidents rely on PIP because they have no health insurance, hospitals say. Under the old system, the state’s no-fault PIP benefits had been subject to fraud and abuse.
- New Jersey: New Jersey is one of the five states with a verbal threshold and one of three with a law that allows people to choose a no-fault or tort-based liability policy. The key to the success of a verbal threshold is to preserve the strict limit on filing of lawsuits. Since the law was rewritten in 1998, the state Supreme Court has ruled on several verbal threshold cases. The most recent involves emotional distress, which is not specifically mentioned in the law as an injury that meets the threshold. In June 2008, in Jablonowska v. Suther, the New Jersey Supreme Court ruled in a 4-3 decision that a plaintiff may recover claims for severe emotional harm that may be expected from having perceived the death of or serious injury to a spouse or an intimate family relative. Jablonowska was driving with her mother when her car was hit in the rear, causing it to crash into the concrete divider. When she regained consciousness, she saw that her mother was seriously injured. At the hospital she was pronounced dead. Voting against recovery of damages for emotional distress, dissenting justices said that the decision opened the way for distinctions regarding the severity of accidents that the legislature never considered when they adopted the verbal threshold in 1998.
- Insurers have been monitoring case filings to determine whether a June 2005 New Jersey Supreme Court ruling in what is known as the DiProspero case has had a significant effect on the number of court filings. Initially, it was feared that the decision would allow many more people to sue for pain and suffering, effectively negating the cost advantages of choosing no-fault coverage. However, so far, there has been no appreciable change. The DiProspero ruling weakened the verbal threshold that is designed to keep all but the most seriously injured drivers from suing for noneconomic damages.
- The language defining the threshold was modified by the legislature in 1998 when the state auto insurance law was completely revamped. In the DiProspero case the high court said that if the legislature had intended to make it more difficult for accident victims to obtain an award through the courts, then it should have written the new statute accordingly.
- A lawsuit has been filed by the state’s Medical Society and others seeking to modify a PIP medical fee schedule. The fee schedule, which was to take effect in October 2007, is a list of maximum charges for certain common treatments and procedures. It was adopted by the state’s Insurance Department in an attempt to control soaring medical care fees paid by insurers for treatment related to auto accidents. The Insurance Department said that it will consider at a later time whether a fee schedule for hospitals is needed. A ruling by the court is expected soon.
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STATE AUTO INSURANCE LAWS GOVERNING LIABILITY COVERAGE
| - In the following 28 states auto liability is based on the traditional tort liability system. In these states, there are no restrictions on lawsuits:
Alabama
Alaska
Arizona
California
Colorado
Connecticut
Georgia
Idaho
Illinois
Indiana
Iowa
Louisiana
Maine
Mississippi
Missouri
Montana
Nebraska
Nevada
New Mexico
North Carolina
Ohio
Oklahoma
Rhode Island
South Carolina
Tennessee
Vermont
West Virginia
Wyoming
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BACKGROUND
Currently, state auto liability insurance laws fall into four broad categories: no-fault, choice no-fault, tort liability and add-on. The major differences are whether there are restrictions on the right to sue and whether the policyholder’s own insurer pays first-party benefits, up to the state maximum amount, regardless of who is at fault in the accident. These alternative systems have evolved over time as consumers, regulators and insurers have sought ways to lower the cost and speed up the delivery of compensation for auto accidents.
The Different Auto Insurance Systems
No-fault: The no-fault system is intended to lower the cost of auto insurance by taking small claims out of the courts. Each insurance company compensates its own policyholders for the cost of minor injuries, regardless of who was at fault in the accident.
The term “no-fault” can be confusing because it is often used to denote any auto insurance system in which each driver’s own insurance company pays for certain losses, regardless of fault. In its strict form, the term no-fault applies only to states where insurance companies pay first-party benefits and where there are restrictions on the right to sue.
These first-party benefits, known as personal injury protection (PIP), are a mandatory coverage in true no-fault states. The extent of coverage varies by state. In states with the most comprehensive benefits, a policyholder receives compensation for medical fees, lost wages, funeral costs and other out-of-pocket expenses. The major variations involve dollar limits on medical and hospital expenses, funeral and burial expenses, lost income and the amount to be paid a person hired to perform essential services that an injured non-income producer is unable to perform.
Drivers in no-fault states may sue for severe injuries if the case meets certain conditions. These conditions are known as the tort liability threshold and may be expressed in verbal terms such as death or significant disfigurement (verbal threshold) or in dollar amounts of medical bills (monetary threshold).
Choice no-fault: In choice no-fault states, drivers may select one of two options: a no-fault auto insurance policy or a traditional tort liability policy. In New Jersey and Pennsylvania the no-fault option has a verbal threshold. In Kentucky there is a monetary threshold.
Tort liability: In traditional tort liability states, there are no restrictions on lawsuits. A policyholder at fault in a car crash can be sued by the other driver and by the other driver’s passengers for the pain and suffering the accident caused as well as for out-of-pocket expenses such as medical costs.
Add-on: In add-on states, drivers receive compensation from their own insurance company as they do in no-fault states, but there are no restrictions on lawsuits. The term “add-on” is used because in these states first-party benefits have been added on to the traditional tort liability system. In add-on states, first-party coverage may not be mandatory and the benefits may be lower than in true no-fault states.
The Beginning of No-Fault: In the 1960s, the traditional auto liability insurance system became the target of public criticism. Dissatisfaction was expressed not only by those purchasing auto insurance but by companies and agencies marketing it and by state officials regulating it. The debate focused on the often expensive and time-consuming process of determining who is at fault—legally liable—when accidents occur.
To reduce the delays and inefficiencies of the system, legislation was introduced in the 1970s in many states, which for the first time allowed accident victims to recover such financial losses as medical and hospital expenses and lost income from their own insurance companies.
Twenty-four states, including the District of Columbia and Puerto Rico, now have laws that allow policyholders to obtain compensation for auto accidents from their own insurers. Of these, 12 states and Puerto Rico have placed restrictions on the right to sue either through a monetary threshold, which allows a suit to be filed for pain and suffering when medical expenses reach a certain stipulated amount or through a descriptive or verbal threshold, which allows suits only when the injury incurred meets the criteria for a serious injury as defined (hence the term verbal or descriptive) by state statute. These are the only true no-fault states.
Pennsylvania, formerly an "add-on" state, began offering consumers the choice between a verbal threshold and no restrictions on lawsuits in July 1990. (New Jersey and Kentucky also offer such a choice, except that Kentucky’s threshold is monetary). This is Pennsylvania's second no-fault law. An earlier law was repealed in 1984.
The District of Columbia has neither a true no-fault nor an add-on law. It offers drivers the option of no-fault benefits or fault-based coverage. In the event of an accident, a driver who originally chose to receive no-fault benefits has 60 days to decide whether to receive these benefits or to take the other party to court. This means that, in effect, there are no restrictions on lawsuits.
Variations On The No-Fault Approach: In the early 1990s, the concept of pure no-fault, which prohibits most lawsuits for bodily injury, began to garner support. Pure no-fault addresses several societal concerns: the waste of resources and the inequities in the liability system and the need to have affordable coverage for medical care and rehabilitation costs. The first attempt at a pure no-fault system was "pay-at-the-pump," a scheme to pay for no-fault auto insurance through a fee collected on gasoline sales. The "pay-at-the-pump" initiative campaign failed in all states in which the plan was considered, including California, due to opposition to the gasoline usage-based fee, but the pure no-fault idea was incorporated into a variety of legislative proposals in various states including both Hawaii and California. Proposals introduced in Congress for a “choice” pure no-fault auto insurance system never reached the floor for a vote.
Some auto insurance reformers have proposed the elimination of noneconomic damages from tort liability coverage as a way to reduce costs, with optional coverage provided as a first-party coverage with a pre-determined limit. The premium savings would come not only from the elimination of coverage but also from the reduced temptation to inflate medical costs to boost noneconomic damages which are generally calculated as a percentage of economic damages.
In the late 1980s, Project NEW START, a national nonprofit consumer organization that was devoted to promoting a new auto insurance policy, developed legislation that would offer motorists a choice between a traditional liability-based policy and a strict no-fault policy. Motorists who chose the no-fault program would have had the option to purchase personal injury protection (PIP) above the basic limits and also coverage for pain and suffering. In the first full year after the law took effect, drivers who chose the no-fault policy would have seen their premiums reduced by a significant amount—at least 20 percent of the statewide average premium for insurance required by the state's financial responsibility law, according to the plan. Another version of choice no-fault was known as the O'Connell plan, after University of Virginia Law Professor Jeffrey O'Connell, who, along with Robert E. Keeton, first proposed a no-fault accident compensation system in 1965. This plan allowed a policyholder who chose the tort system and was involved in an accident with a no-fault driver to file a claim under the uninsured motorist provision of the policy. The no-fault driver could not sue and was immune from suits.
Various modifications of these basic proposals have since been introduced in many states, along with measures known as "no-frills" policies that would provide no-fault basic coverage for economic losses to all good drivers in the state for a standard statewide premium. New Jersey's choice no-fault law, passed in 1998, comes closest to this concept with a basic coverage option.
A critical decision in developing a choice no-fault system is how the choice law is framed. In New Jersey, applicants for insurance are presumed to have opted for the verbal threshold on lawsuits unless they specifically reject it; in Pennsylvania, the opposite is true. Pennsylvania policyholders are assumed to want unrestricted access to the courts unless they specifically request the verbal threshold. As a result, more than 85 percent of policyholders in New Jersey have policies restricting lawsuits. By contrast, less than 50 percent have this kind of policy in Pennsylvania, the largest percentage being drivers in Philadelphia where rates are highest. (This is due, in part, to a high propensity among the city's drivers to file bodily injury claims after an auto accident. More than 55 percent of accidents that cause some physical damage there also result in a bodily injury claim, while in other parts of the state the ratio of such claims to physical damage claims is only 17 percent, insurers report.)
Pay-At-The-Pump: Beginning in the early 1990s, a concept that melded a no-fault auto insurance system with funding through surcharges on gasoline was considered in several states including California, where its supporters worked to put it before the voters as a ballot initiative. However, overwhelmed by the fierce opposition to the concept by California businesses and suburban and rural motorists who would have shouldered the brunt of the gasoline tax increase, the coalition for Common Sense Auto Insurance withdrew their proposal. The initiative, called the Uninsured Motorist Act, because it would force all drivers to pay something towards the cost of auto crashes, was sponsored by financial columnist Andrew Tobias. The measure would have imposed a 25-cent per gallon surcharge on gasoline and a $141 auto registration surcharge to fund the state-run insurance operation. Bad drivers would have paid an additional surcharge.
The pay-at-the-pump concept is based on the premise that the primary determinant of accident costs is miles driven, when in fact miles driven plays only a minor role in the cost of accidents. Research suggests that the major determinant is traffic density. However, new insurance policies designed to lower the number of miles driven to reduce greenhouse gases emissions, so-called “green” policies, provide discounts for low mileage.
Since the concept first surfaced in California, pay-at-the-pump bills have been introduced in Colorado, Massachusetts, Nevada and Texas and the concept was considered by the Council of the City and County of Honolulu. In Florida, the House Insurance Committee studied the feasibility of the pay-at-the-pump concept. A pay-at-the-pump bill has been introduced in Colorado periodically but it has garnered little support. And in Louisiana and Hawaii, as part of an effort in 1997 to reduce auto insurance prices, committees were formed to study the idea.
Pay-at-the-pump’s greatest virtue is that is would eliminate the cost of litigation, like a traditional no-fault system. Beyond that, the proposal has serious flaws. First, instead of paying one premium every six months, drivers would be taxed to pay for insurance in hundreds of transactions throughout the year. They would pay every time they bought gasoline and when they registered their car. In addition, their health insurance premiums would rise since pay-at-the-pump pays only for unreimbursed medical care costs.
Second, it treats all drivers alike by making how much gasoline a person uses the primary determinant of how much a person will pay for insurance instead of an individual’s driving experience and driving record, and the type of vehicle that person drives. Thus, a parent driving a group of ten-year-olds to a neighborhood baseball game in a minivan would pay more for insurance coverage than an eighteen-year old cruising around on a Saturday night, despite the fact that adults as a group are safer drivers than teenagers and minivans are among the safest types of cars. Small cars use less gasoline than minivans so drivers of small cars would pay less for their insurance than minivan drivers, even though small car collision claims are much higher and small car occupants more likely to suffer serious injury in a collision.
Third, it places a burden on those who have to drive long distances to get to work. People who drive long distances to work in outlying areas, for example, could end up paying twice as much for insurance coverage as under the current system because pay-at-the-pump ignores distinctions between driving conditions in congested city areas where claims are high and driving conditions in the outer suburbs and rural areas.
Overview of Enactment of Laws: The jurisdictions that have forms of true no-fault auto insurance and the dates on which the laws originally became effective are shown below. Compulsory first-party/liability insurance; some restrictions on lawsuits:
Florida, January 1, 1972; temporarily repealed effective October 2007; reenacted effective January 2008
Hawaii, September 1, 1974
Kansas, January 1, 1974
Kentucky, July 1, 1975
Massachusetts, January 1, 1971
Michigan, October 1, 1973
Minnesota, January 1, 1975
New Jersey, January 1, 1973
New York, February 1, 1974
North Dakota, January 1, 1976
Pennsylvania, July 1, 1990 (earlier law passed on July 19, 1976)
Utah, January 1, 1974
Puerto Rico, 1970
States that have repealed their no-fault laws:
Nevada: effective 1974; repealed 1980
Pennsylvania: effective 1976; repealed 1984 (reenacted 1990)
Georgia: effective 1975; repealed 1991
Connecticut: effective January 1, 1973; repealed 1993
Colorado: effective April 1974, repealed July 2003
Georgia repealed its no-fault law effective October 1, 1991. In states with weak no-fault laws (Georgia's monetary threshold was $500) costs tend to increase more rapidly than in states with a verbal threshold because weak laws provide the broad benefits of a no-fault system without sufficient offsetting savings — almost as many cases go to court as in a traditional tort-based system. In addition, personal injury benefits (PIP) were low. Minimum coverage provided only $2,500 per accident for medical costs (although policies with higher limits could be purchased.) The combination of low mandatory PIP coverage and a low monetary threshold pushed many cases where injuries were minor into the courts, driving up costs.
Then in 1993, Connecticut repealed its no-fault law. The law had been comparatively ineffective because its threshold for lawsuits was only $400.
Colorado’s law was repealed or, more exactly, allowed to expire in 2003 after Gov. Bill Owens said that he would not sign another extension unless it significantly reduced the costs of the existing system. But lawmakers could not resolve a dispute about the extent of coverage for medical procedures. Rates in 2002 increased by as much as 20 percent, more than twice the national average, due to the no-fault’s law generous medical care benefits and a low threshold for lawsuits.
Effectiveness of No-Fault Auto Insurance: As noted earlier, insurers generally favor laws that provide for verbal thresholds on suits instead of dollar thresholds. One of the disadvantages of having a "dollar target" for medical expenses is that it may encourage the submission of fraudulent claims. In addition, unless the law includes a provision that enables the threshold to be adjusted to keep pace with inflation, (medical costs, for example, have been increasing at a rate of close to 10 percent a year) its effectiveness in curbing litigation is gradually eroded.
The no-fault concept and strong restrictions on filing suit were given additional support by a study on bodily injury claim costs, the findings of which were made public in March 1989. The study, "Compensation for Automobile Injuries in the United States," conducted by the All-Industry Research Advisory Council (now the Insurance Research Council), showed that states with strong no-fault laws were more successful in holding down auto injury costs during the 10-year period, 1977-1987, than other states. New York's average bodily injury costs rose 73 percent, Florida's 71 percent and Michigan's 112 percent. (These states, all three of which have strong no-fault laws, also had much lower overall injury costs, especially Michigan.) The average rise in bodily injury costs nationwide was 146 percent during the period.
There is a wide variation in monetary thresholds and in other benefits provided. For example, monetary thresholds range from $1,000 in Kentucky to $4,000 in Minnesota. In Utah, the medical benefits limit is $3,000 and in Michigan there is no limit on the medical benefits a claimant may receive. One problem in states with higher than average PIP benefits is that dishonest providers of professional services have found ways to abuse and cheat the system, pushing up the cost of auto insurance. New Jersey pioneered reforms designed to curb overuse of medical care in its overhaul of the auto insurance system in 1998. Other states have modeled their reforms on the New Jersey protocols.
Fraud and PIP Benefits: In a number of no-fault states, PIP coverage is being exploited by fraud rings that include phony pain clinics and corrupt physicians, chiropractors and lawyers, particularly in states where PIP benefits are generous.
These criminal groups have created medical “mills,” phony clinics that file fraudulent auto insurance medical claims. In an attempt to address this drain on resources, New York modified regulation 68, a reform adopted in 2002 that substantially shortened the time period for reporting auto accident injuries and submitting bills for medical treatment. The reduced notification time allows insurers to look at the treatment plan sooner, thus providing fewer opportunities for unnecessary diagnostic tests and treatments. New Jersey dealt with the problem of unnecessary medical treatment by creating precertification medical guidelines, or Care Paths, for the treatment of specific injuries that result from auto accidents, primarily soft tissue injuries.
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KEY SOURCES OF ADDITIONAL INFORMATION
Summary of Selected State Laws and Regulations Relating to Automobile Insurance, American Insurance Association.
© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED
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