Commentary: The Failure of No-Fault Insurance

In its widest sense, “no-fault insurance” is a term used to describe any auto insurance coverage under which policyholders are paid for personal injuries and property damage they sustain in accidents through their own insurance company, regardless of fault. In many ways, it is like first-party coverage. However, the term “no-fault” is most commonly used in the context of state-wide insurance programs and laws which dictate that a policyholder (and his passengers) are not only reimbursed by the policyholder’s own insurance company without regard to fault, but are also limited in their right to sue negligent tortfeasors responsible for causing their injuries and damages.

No-fault auto insurance laws involve the auto insurance company providing first-party medical and/or wage loss benefits, without regard to the fault of the insured, in exchange for the insured giving up some degree of freedom to sue the tortfeasor for pain and suffering and other non-economic damages. No state has “absolute” no-fault, where the driver completely relinquishes the right to bring a lawsuit against the tortfeasor for non-economic damages in exchange for first-party economic damages. Some states use terms other than “Med Pay” and “PIP,” such as “Basic Reparation Benefits,” but the concept is the same.

In the early 1930s, a group of professors from Columbia University took a critical look at America’s auto insurance system. They proposed a system of scheduled benefits just as the young workers’ compensation system did at the time. The objective was to implement quick and complete payment for property damages and personal injuries incurred in auto accidents without burdening the civil justice system. They modeled it after another young American no-fault compensation system, workers’ compensation.

The goal of the Columbia professors was to achieve quick and complete compensation of auto accident claims without the need for litigation. They suggested moving from the American tradition of resolving disputes through litigation to a system where those injured or suffering damages as a result of an auto accident would be compensated by their own insurance company, regardless of whether they were at fault. Their proposal prohibited recovery of non-economic damages (pain and suffering, mental anguish, etc.) and allowed only the recovery of economic damages (medical expenses and lost wages).

The Columbia proposal languished in neutral for years until 1965, when two more educators − Robert Keeton and Jeffrey O’Connell — published a limited no-fault system applicable exclusively to minor auto accidents, which they entitled Protection for the Traffic Victim. Robert E. Keeton and Jeffrey O’Connell, Basic Protection for the Traffic Victim: A Blueprint for Reforming Automobile Insurance (1965). This study put no-fault auto insurance in the limelight. U.S. Dept. of Trans., St. No-Fault Automobile Insurance Experience, 1971-77 (1977), a/k/a “The DOT Report.” The proposal was that those injured in an accident would be compensated for medical expenses and lost wages, no matter who was at fault. However, compensation for non-economic damages via the U.S. tort system would not be allowed except for the most serious of cases or when certain “thresholds” were met. One proposed threshold was $5,000 in non-economic damage. Aggrieved auto accident victims would be allowed to recover only those medical expenses and other economic costs which exceeded the no-fault benefits provided.

In 1971, Massachusetts became the first state to pass a form of auto no-fault insurance. Robert H. Joost, Automobile Insurance and No-Fault Laws, § 2:17 (2d Ed. 1992). The leading proponent of the initiative was then-Massachusetts state legislator and later Democratic presidential candidate Michael Dukakis, who had taken one of Keeton’s courses and learned through an intermediary about the as-of-yet unpublished Keeton-O’Connell study. Dukakis got a copy of the study and became convinced that no-fault was a political issue he wanted to run with. During the next several years, Dukakis turned to Keeton for advice as he fostered no-fault through the Massachusetts Legislature.

From 1971 to 1976, in an effort to hold down the cost of auto insurance, 16 states enacted no-fault auto insurance laws which featured two key components:

(1) The compulsory purchase of first-party no-fault coverage for medical benefits and loss of income for drivers and passengers (usually referred to as Personal Injury Protection or PIP benefits); and

(2) Limited third-party tort liability of negligent drivers.

Three other states enacted similar no-fault laws during this time period, without limiting tort liability. Today, no state has pure no-fault. Instead, every state currently with a no-fault system has adopted a modified no-fault system. This means that the no-fault carrier still pays for your economic damages up to the policy limit, but you may be allowed to sue for non-economic damages if the amount of these damages exceeds a specified “threshold.” The threshold can be either verbal or monetary (or a combination) and is designed to limit lawsuits to only the more serious injuries.

(1) Verbal Thresholds: In states that have a verbal threshold, lawsuits for non-economic damages such as pain and suffering are limited to “serious” injuries or death – essentially an adjective used to describe when and for what kind of tort damages they can sue for. “Serious” is defined differently in each state, but it often includes broken bones, severed limbs, and other specifically-identified injuries. Unless the defined criteria for a “serious” injury are met, the victim cannot bring a lawsuit against the other driver. Unfortunately, sometimes a serious injury is not included in the defined verbal threshold.

(2) Monetary Thresholds: In states that have a monetary threshold, lawsuits for non-economic injuries such as pain and suffering are precluded unless a certain dollar amount in medical bills is reached. Some argue that accident victims make unnecessary visits to their medical provider in order to run up their medical bills and reach the threshold.

Today, twelve states and the District of Columbia have “modified” no-fault auto insurance laws, where first-party economic benefits are provided regardless of fault and the right to sue for non-economic damages is allowed only after satisfying a statutorily-defined monetary, verbal, or combination of the two thresholds. Florida, Michigan, New Jersey, New York, and Pennsylvania have verbal thresholds, one which defines in plain language the precise injury or a level of “serious injury” which must be met in order to sue. Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota, and Utah have monetary thresholds, where a specific dollar amount of medical expenses must be reached before being able to sue. Nine states have auto insurance systems which offer add-on no-fault benefits. They are Arkansas, Delaware, Maryland, Oregon, South Carolina, South Dakota, Texas, Virginia, and Washington. These states offer PIP or similar benefits in varied amounts and under varied conditions, but do not restrict third-party lawsuits.

Choice is another hybrid of the pure no-fault system. It creates two classes of insured drivers by retaining parts of both the pure no-fault and traditional fault-based systems. Three states − New Jersey, Pennsylvania, and Kentucky − have “choice” no-fault. Under choice no-fault systems, drivers have the option of being covered under either a pure, limited tort, no-fault policy, where you cannot sue third parties for non-economic damages and are immune from such suits yourself; or a modified no-fault policy, where you can sue other drivers who have also chosen to retain their tort rights, and they can sue you.

The no-fault experiment has received mixed reviews over the past thirty years, but in hindsight, it appears to be failing. There have been no states since 1976 who have adopted no-fault and several states have completely repealed their no-fault laws. Benefits of a no-fault system are supposed to include:

• Quicker payment of claims by eliminating costly and time-consuming litigation over liability.
• Accident victims no longer have to split fees with lawyers.
• Lower insurance rates because expensive non-economic damage awards and legal fees required to defend liability claims are eliminated − legal fees currently account for 12 percent of premium costs.
• Reduction in the number of lawsuits and an elimination of litigation costs.
• No subsidizing uninsured motorists; your insurer covers the cost of your medical bills.
• Lower rates mean that auto insurance is accessible to people of lesser means.

Opponents of no-fault insurance – including the author – argue that these benefits are mostly theoretical and past performance has proven that no-fault has been ineffective to accomplish its stated goals. Drawbacks of a no-fault system include:

• No or limited compensation for pain and suffering, paralysis, or other non-economic damages; arbitrary limits are imposed.
• Under pure no-fault and choice systems, bad drivers are protected because they cannot be sued for the damages they cause. The system does not reward a good driver.
• Rates are actually higher under no-fault. Regardless of theory, insurance premiums in no-fault states are on average 25 percent higher than in traditional liability states.
• There is no reduction in litigation costs under a no-fault system. The time and effort insurers once spent defending litigation claims is now spent defending lawsuits brought by their own insured for failure to pay no-fault benefits. In modified no-fault states, tremendous time and energy is spent litigating over whether or not the tort threshold requirement has been met.
• Even your economic damages are limited by the terms of the policy. In traditional tort states, you are fully compensated for your loss by suing the driver responsible for your injuries. No-fault states have limits on liability, even for your basic economic damages. These limits result in people being forced to pay for any unpaid medical bills without recourse against the driver who caused the injuries.

It appears that a movement away from the no-fault system is in full swing. The most recent state to convert from a no-fault system back to a traditional tort system is Colorado, which did on July 1, 2003. For information on insurance limits, proof of insurance and required/optional coverage available in each state, please see the following website: http://www.dmv.org/al-alabama/car-insurance.php.

Ultimately, the grade no-fault receives is centered on cost. A report issued by the National Association of Insurance Commissioners (NAIC) examined the cost of no-fault insurance. Of the ten states with the most expensive auto insurance, eight were no-fault states. Since then, three of those eight – Pennsylvania, New Jersey, and Connecticut – have taken the first step away from no-fault by repealing the mandatory nature of no-fault insurance.

States With Highest Average Auto Liability Premiums

*Mandatory No-Fault State

**Mixed or Hybrid No-Fault State

***No-Fault Made Optional 1990

****No-Fault Made Optional 1991

*****No-Fault Repealed 1993, Effective 1994

It continues to be the case that a majority of the states with the highest average auto insurance premiums have been no-fault states. In addition, premiums in mandatory no-fault states rose nearly 25 percent greater than in no-fault states, during the years studied for the NAIC report. Of the fifteen states with the greatest increases in the nation, nine had some form of no-fault. During the years looked at in the study, four states significantly altered their no-fault systems. Georgia eliminated no-fault and mandated a 15 percent rollback in premiums. Connecticut repealed no-fault after six annual average premium increases of 8 percent or more. Pennsylvania repealed its mandatory no-fault law in 1990 and motorists who chose to operate under the tort-based system were provided a 10 percent rollback, while those choosing no-fault were offered a 22 percent rollback. Despite the substantially greater refund offered under no-fault, an estimated 60 percent of motorists returned to the Personal Responsibility System. New Jersey repealed mandatory no-fault in 1989 and experienced significant reductions in average liability premiums.

No-fault insurance – like free health care and free education – sounds good, but doesn’t work in the real world. No-fault premiums are more expensive than personal responsibility systems where tort actions are allowed, because both the innocent victim and the careless tortfeasor are compensated regardless of fault. Paying the costs of both drivers is logically more expensive than in the tort system, where the liability policy of the careless driver covers only the innocent victim. Like many Utopian ideas, proponents of no-fault acknowledge that, while it may not lead to lower costs, its advantage is a “redistribution” of insurance benefits based on “need” rather than “fault.” Because making a claim under no-fault doesn’t require the litigation safeguards and procedural obstacles of a tort system, claimants have greater opportunity to inflate and maximize their claims up to the policy limits. The complicated no-fault schemes in states like New Jersey, New York, and Michigan, is understood by only a handful of lawyers and rivals the cryptanalysis of the Enigma Code in their complexity.

Contrary to public perception, no-fault does not reduce litigation costs. Litigation, over property damage (the most common dispute following an accident), and, over whether a claimant has reached a verbal or monetary threshold, continues to plague no-fault states. In addition, due to the growing number of uninsured drivers, expensive liability insurance must still be purchased by no-fault consumers. Insurance covering liability above no-fault limits is also a concern. No-fault states have experienced higher – not lower – levels of litigation. In fact, under pure no-fault, uncompensated victims would be left with proceeding recourse from taxpayer-subsidized programs such as Medicare, Medicaid or victim’s compensation funds. No-fault has led to a significant increase in the litigation of first-party benefits.

Not only is no-fault confusing and dysfunctional, it also contradicts basic American principles such as individual responsibility and accountability. By eliminating “fault”, the law treats good drivers and bad drivers the same. This weakens the deterrent effect of tort law. It also eliminates full compensation. In an effort to avoid the abuse of claims for pain and suffering and other non-economic damages, the experiment has thrown the baby out with the bathwater.

The American civil justice tort system is far from perfect. But, before liability insurance professionals jump to the conclusion that eliminating the trial lawyers from the equation is always desirable – not to mention possible – a candid look at the results of the no-fault experiment is called for. As one Michigan lawmaker put it:

What we did not count on when we enacted our no-fault legislation was a drastic increase in first-party litigation. You are seeking to enact no-fault legislation to contain costs, to provide prompt and adequate coverage and to reduce the need for litigation. Auto no-fault does not result in a reduction of litigation. The number of first-party auto no-fault lawsuits filed in Michigan is nearly three times as great as the number of third-party suits. Most of our insureds who file suits find themselves not suing a liable negligent driver, [the third party] but, rather, suing their own insurer for their own first-party benefits. This has resulted in driving up administrative costs and has considerably lengthened the time it takes for insureds to receive benefits. Auto no-fault does not reduce the number of suits filed or the cost of litigation.

Auto Insurance Reform: Hearing on S. 140 Before the House Comm. on Econ. Dev. and Energy, Educ., Ins. and Labor (undated statement of Michigan Representative Nelson W. Saunders) (See http://mail.consumerwatchdog.org/insurance/fs/fs000218.php3.

The word “Utopia” itself is a Greek word for an imaginary place where everyone and everything is perfect. As John Malkovich said, “Utopia means elsewhere.” Wherever it may one day be found, it most certainly will not be found disguised as no-fault auto insurance.