No-Fault Auto Insurance
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.
- States: Florida: Reforms passed in the 2012 legislative session are beginning to take effect, causing person injury protection (PIP) rates to decrease, according to January 2014 report by the state’s Office of Insurance Regulation. But because PIP coverage is a small part of the total cost of a typical auto insurance policy the savings may seem small. Nevertheless, the fact that reforms are working may prompt lawmakers who favor scrapping no-fault to rethink their position. PIP coverage is expected to drop by an average of 13.2 percent, based on a review of data from 20 insurers that provide auto insurance to more than 75 percent of the Florida market. The result would be an overall 1.2 percent reduction in rates. The drop is in line with projections made when the reform law, HB119 was passed.
- The state’s 2012 no-fault reform law, designed to curb fraud, has come under attack by medical providers who believe the legislation seriously restricts their ability to make a living. Their concerns resulted in a Florida court putting a halt to parts of the law in March 2013, but the injunction was reversed in October 2013. The court said that the plaintiffs had not shown that they were being harmed.
- Meanwhile, some lawmakers favor repealing no-fault auto insurance coverage and replacing it with a tort-based system under which injured drivers may sue the at-fault party. All drivers would be required to purchase bodily injury liability coverage that pays for the injuries they cause to other people. Insurers are divided over whether to repeal the no-fault system now or whether reforms should be given a chance to work.
- The law, which took effect in July 2012, was to be implemented in several stages. In January 2013 the two components that have been the subject of lawsuits were put into effect: injured drivers and their passengers must seek initial medical treatment from a hospital, family doctor or chiropractor within 14 days of the incident; and the type of treatment sought must reflect the extent of the injuries they have sustained. Where the injured person does not require emergency medical attention, the limit for medical care is $2,500 rather than the full $10,000 in PIP benefits.
- The law also provides penalties for doctors who commit fraud, provisions designed to reduce opportunities to use the no-fault auto insurance system for illicit profits. Another provision reduces the pressure on insurers to pay fraudulent claims because there is too little time to fully investigate. The law allows an investigation to be extended by an additional 60 days, with notice to the policyholder, for 90 days in total.
- There have also been changes in the way clinics are licensed, and since July 2012 police have been using a long version of the crash report whenever accidents involve injuries in the expectation that the longer report with more detailed information will deter fraud.
- On October 1, 2012 insurers were required to submit a rate filing to state regulators that showed at least a 10 percent rate reduction or documentation for why they cannot. Most major insurers requested decreases in PIP coverage. The PIP portion makes up about 20 percent of the premium, according to the Office of Insurance Regulation.
- Billings for massage and therapeutic exercise grew enormously under the old law, according to the Consumer Advocate’s PIP report. These two procedures were the most commonly billed procedures under the old PIP system, the report says.
- Most observers agree that Florida’s auto insurance system was riddled with outright fraud and blatant abuse. Data from Chief Financial Officer Jeff Atwater’s office shows that while the number of drivers in Florida held steady and the accident rate even declined, going from 1.76 per 100 licensed drivers in 2005 to 1.52 in 2010, insurance costs dramatically increased, resulting in what some call a “fraud tax.”
- New York: In his 2014-15 Executive Budget, Governor Andrew Cuomo said he would expand the New York Financial Services’ ability to audit healthcare providers participating in the no-fault auto insurance system in order to prevent fraudulent providers from receiving payment and fining providers who engage in illegal activities. The department will be authorized to make unannounced inspections. Insurers are also pushing for legislation that accomplishes the following: makes staged accidents a felony; ends fraudulent billing by fly-by-night durable medical equipment providers; permits retroactive cancellation of fraudulently obtained auto insurance policies; and requires medical care providers to prove that a prescribed treatment is medically necessary, according to the New York Insurance Association and Insurance Journal.
- The Cuomo Administration has already taken several steps to curb fraud. In February 2013 the New York State Department of Financial Services adopted three amendments to Regulation 68, the law that implements the state’s no-fault law claim settlement procedures. The first amendment would prevent billing for services that were not provided or billing more for services than the established fee. The second amendment would set a deadline for health care providers to respond to requests for verification that the treatment provided was medically necessary. The third amendment would prevent immaterial paperwork errors from invalidating a denial of a claim or a request for verification. This last amendment should substantially reduce litigation and arbitration dealing with claim processing errors and speed up the resolution of no-fault claims, the department says.
- The arrest in March 2012 of 36 people, part of a criminal ring that included physicians and personal injury lawyers, drew attention to New York’s no-fault insurance crisis, its huge cost and the seriousness and extensiveness of the crime. The group, which had billed insurers more than $279 million in fraudulent claims since at least 2007, used runners to chase ambulances and locate victims of actual accidents who were then sent to the group’s medical clinics, sometimes for unnecessary medical treatment or sometimes just to sign their names.. Department of Financial Services Superintendent Benjamin Lawsky announced at the time of the arrests that doctors with suspicious billing patterns will be required to sign affidavits concerning the lawful use of their licenses.
- A study of New York’s no-fault system by the Insurance Research Council (IRC) showed how prevalent fraud is in the New York City area. About one in every five claims settled appears to have some element of fraud and as many as one in three appears to be inflated, according to the IRC. Over the period 2007 to 2010, the percentage of no-fault claims that were fraudulent or were inflated (built-up) by excessive billing by unscrupulous medical care providers or by unnecessary medical services rose from 29 percent to 35 percent. In the fall of 2010 alone, fraud was found in 22 percent of all New York City metropolitan area no-fault auto insurance claims and build-up in another 14 percent.
- In its final report on closed auto injury claims in New York State, published in November 2011, the IRC said the average loss among claimants in the New York City metropolitan area was more than double the average loss in the rest of the state, $15,086 compared with $6,870. It also highlights the differences in what it calls claiming behavior between residents of New York City residents and those of the rest of the state, noting that New York City residents were more likely to be treated in clinics, visit chiropractors, physical therapists and acupuncturists, receive expensive diagnostic procedures and to report expenses for durable medical equipment. They were also more likely to hire attorneys.
- Michigan: A proposal, HB 4612, was approved by the Michigan House Insurance Committee at the beginning of May 2013 but stalled. This bill would cap benefits provided under the personal injury protection portion of the no-fault law at $1 million, ending an era of unlimited benefits that has driven up costs to what many consider are unsustainable levels. Even with a cap, Michigan’s benefits would still be more generous than those of any other state. New York ranks second, with $50,000.
- The bill would create a special fraud bureau and try to bring medical care reimbursement levels in line with those for other types of insurance. According the American Insurance Association, charges for hospital procedures and treatment for no-fault patients with unlimited medical care benefits have been as much as 400 percent higher than for claimants with the same medical needs covered by workers compensation or healthcare.
- Other attempts to lower the price of auto insurance in the state have not met with success. Michigan is unique among no-fault states in that its no-fault law offers unlimited medical care under its PIP coverage and in that it does not use medical fee schedules (maximum fees that can be charged for common types of medical treatment for auto accidents, similar to the fees set under the state’s workers compensation system).
- In his January 2013 State of the State address, Michigan Gov. Rick Snyder said that reform of the state’s no-fault system was a priority of his administration. Along with a cap on medical care benefits and the creation of a fraud bureau, other ideas that have been circulating are limits on home attendant care and attorney fees; and a new excess insurance (catastrophe fund) mechanism, a feature in the current system that was slated for elimination but is now gaining favor.
- Currently, insurers are reimbursed for claims above $500,000 in medical bills through the Michigan Catastrophic Claims Association (MCCA), created in the late 1970s to handle catastrophic injury cases. The association now covers the medical bills of nearly 13,000 accident victims. The MCCA charges insurers a per vehicle assessment which is passed on the policyholders. This generous system is expensive. Average claim costs in Michigan rose by 81 percent from 2004 to 2012.
- Under legislation signed by the governor in March 2012, it will soon be a felony to act as or employ a “runner” to recruit people for staged accidents or to help commit other types of auto insurance fraud. Those convicted of the crime face up to 10 years in prison and a fine of $50,000.
- Minnesota: Over the past few years, several proposals have been considered, including a bill to change the threshold for filing a lawsuit from $4,000 to a tougher verbal threshold. Although favored by insurers, it had insufficient support among legislators in either house. Another bill would have limited medical benefits for soft tissue injuries, such as sprains and strains, set treatment standards and created a medical fee schedule based on the workers compensation system. Currently, there are no limits on medical care provider expenses.
- New Jersey: After declining in 2003, when auto insurance reform brought more competition to the state, no-fault costs in New Jersey are rising sharply and in 2011 (latest data available) were the highest in the nation, according to the National Association of Insurance Commissioners. Estimates for 2013, based on four quarters ending with the third quarter 2013, put the average cost per claim (severity) at $16,211, compared with $9,911 in 2001, according to ISO data. The number of claims (frequency) declined between 2000 and 2008, offsetting the rise in severity, but has remained relatively stable since then. Although the state set reimbursement fees for a list of common medical procedures relating to auto accidents, a few providers have found ways to get around these regulations by billing for procedures that are not on the list.
STATE AUTO INSURANCE LAWS GOVERNING LIABILITY COVERAGE
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 (the first party) for the cost of minor injuries, regardless of who was at fault in the accident. (The second party is the insurance company and the third is the other party or parties hurt as a result of 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.)
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.
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, and has subsequently worked to place reasonable limits on medical care costs. 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. However, fraud continues to be a major problem in the state. 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.
KEY SOURCES OF ADDITIONAL INFORMATION
Summary of Selected State Laws and Regulations Relating to Automobile Insurance, American Insurance Association.
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