THE TOPIC

AUGUST 2010

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.  

RECENT DEVELOPMENTS

States

• New York: Medical payments under no-fault’s PIP, or personal injury protection, the coverage part that pays for medical care and other benefits if the policyholder has an auto accident, are rising dramatically, in part due to fraud and abuse. PIP average claims costs in the third quarter of 2009 stood at $8,690, the third highest in the country, the first being Michigan and the second being New Jersey. Since the end of 2004, claims costs have risen an astounding 55 percent and fraud investigations have more than doubled. In 2008 the number of arrests for no-fault fraud was 52 percent higher than in 2007. Based on the amount fraud costs add to each claim, no-fault fraud and abuse cost consumers and insurers about $229 million in 2009, according to the Insurance Information Institute. The additional costs, when averaged out over all claims filed in 2009, comes to $1,561, or 22 percent of each claim. When claim costs rise due to fraud, policyholders are forced to pay for it in the form of higher premiums. This so-called fraud tax will rise to an estimated $1,644 per claim if no reforms are enacted.
• At a Senate hearing on no-fault fraud held in Albany at the beginning of February, a New York insurance department official testified that 85 percent of the rate changes being filed with the department were for increases in no-fault rates. The requested increases were averaging 6.5 percent. He said that this situation is likely to continue based on the dramatic increase in referrals to the fraud bureau.
• Corrupt medical professionals, attorneys and street-level criminals who work on their behalf, particularly in New York City, have been able to exploit the system because of loopholes in the law. An analysis of PIP claims from insurers representing 50.1 percent of the state’s auto insurance market, found that between 2007 and 2009 more than four in 1o no-fault claims resulted in lawsuits and almost all of the plaintiffs in lawsuits relating to PIP were healthcare providers. Only 0.4 percent of injured claimants filed lawsuits over that period. 
• New York’s new Superintendent of Insurance, James Wrynn, is proposing revisions to Regulation 68, which implements New York’s no-fault law. The changes would more effectively combat fraud and abuse, he says.  One proposal would require claimants to provide additional information on forms filed to help ensure that the treatments being claimed for were medically necessary. Another proposal would simplify the procedures required for insurers to suspend payment of claims to a medical clinic while an investigation of the clinic’s licensing status was underway. The Superintendent also called for legislative action, including modifications to the rule that insurers who do not deny a claim within 30 days must pay that claim. This encourages unscrupulous individuals and medical providers to file numerous claims for the same case, sometimes overwhelming employees investigating the claim, knowing that the insurer will have to pay the claim if it is not denied within the time period.
• Below are other proposals that would help plug these loopholes: 

Require that disputes be resolved by arbitration to speed up the resolution of claims and avoid the costs and uncertainty of a trial. Although the no-fault system was created to reduce the number of cases going to trial, currently court dockets in New York are clogged with auto insurance cases. In New York City, trial dates in some jurisdictions are already being set for the year 2011.  

Permit those with claims for less than $5,000 to submit proof based on a doctor’s sworn affidavit. Under today’s system, doctors must appear in court in person.

Strengthen the penalty for acting as a runner, the term used for the person who gets paid for facilitating fraudulent transactions, usually as a go-between for dishonest policyholders and corrupt medical professional and/or attorneys. The crime is currently a misdemeanor. It should be a felony.

Raise the Burden of Proof for receipt of no-fault benefits by requiring the plaintiff to produce a witness with personal knowledge of the facts alleged in the complaint. New York’s medical treatment providers are only required to submit proof that the insurers received the bill in order to establish that they are entitled to receive amounts that they billed, irrespective of suspicions of fraud or abuse.

• Michigan: Michigan is unique among no-fault states in that its no-fault law offers unlimited medical care under its PIP coverage. This generous system is expensive. Although PIP costs in the country as a whole remained stable between 2000 and 2006, in Michigan they rose by 96 percent, according to a study by RAND’s Institute for Civil Justice. Not surprisingly, Michigan’s auto crash costs are higher than elsewhere in the country. Using a statistical model, RAND found that Michigan claims were 57 percent higher than the average auto insurance claim, which resulted in premiums that were 17 percent higher. The higher costs were partly attributable to claimants using a different mix of medical services. In particular, according to the study, Michigan claimants are 19 percent more likely to claim reimbursement for a hospital visit and 25 percent more likely to claim for emergency room use. They are also more likely to claim for x-rays and CT scans, to purchase durable medical equipment and to claim for lost wages, taking advantage of the generous benefits the law requires insurers to offer.
• According to the American Insurance Association, the state’s average PIP claim for the 12 months ending October 31, 2009 was $32,490, double the average for New Jersey, the state with the second most costly PIP claims. As a result, insurance in urban areas is virtually unaffordable for many residents.
• RAND suggests possible options to address higher claim costs, including changing the no-fault auto insurance policy to allow policyholders to limit their PIP coverage, select from a wider range of deductibles or more easily designate their health insurance policy as the primary policy for the payment of medical claims, which would reduce the cost of medical claims, see Colorado above.
• Various proposals for change have been discussed, including  a choice of PIP limits, starting with a low of $50,000. A study commissioned by the Insurance Institute of Michigan found that drivers could save between 15 percent and 45 percent with this option. Another proposal would create a PIP schedule, based on the current workers compensation fee schedule, which sets out maximum payments for certain types of common treatments for injuries, and places certain limitations on in-home attendant care, a major cost driver in Michigan. The legislation would set rates for individuals who care for f amily and friends. However, neither these bills nor those proposed by the state’s insurance consumer advocate in 2009 are likely to be enacted, in part because budget deliberations are taking up so much time, insurers say.  
• 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.
• New Jersey: In August 2009 the New Jersey Court Superior Court, Appellate Division, ruled that a fee schedule adopted two years ago to help control escalating medical care costs can be implemented.  In November the state Supreme Court affirmed that decision. The schedule, which is a list of maximum charges for certain common medical treatments and procedures associated with auto accidents, is designed to set reasonable limits on what insurers pay for care. It had been tied up in court proceedings after the New Jersey Medical Society sued to prevent the schedule from going into effect. The department spent considerable time developing the fee schedule, looking at what doctors are typically paid and setting the level significantly higher, the court noted. The cost of medical treatment for auto accident victims in New Jersey is often higher than medical treatment for similar injuries caused by other types of incidents. The fee schedule is also expected to reduce time-consuming and costly disputes over charges.
• National: Another recently published RAND study discusses trends in no-fault states, nationwide. Focusing on states that maintained the same kind of auto insurance liability system over a period stretching from 1986 to 2004, it found that liability premiums in no-fault states have been consistently higher than in non-no-fault states, due mainly to two characteristics: auto insurance in no-fault states pays for a larger number of medical services and pays more for the same services. Possible explanations include the difference between prices paid under health insurance policies (tort states) and no-fault auto insurance policies, see Colorado above. In addition, the threat of bad faith lawsuits for late payment or nonpayment of claims may restrict the ability of auto insurers to thoroughly investigate questionable submissions.  

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 (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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