Over the past few years, increasing frustration with fraud,abuse and massive cost increases in several jurisdictions hasforced legislators and regulators to take a serious look at reformof their state's no-fault laws.

Today, 12 states have no-fault systems: Florida, Hawaii, Kansas,Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota,Pennsylvania and Utah. Each state's laws differ with respect tolitigation thresholds, personal injury protection (PIP) limits andother factors such as the threat of lawsuits for “bad-faith”—all ofwhich influence the effectiveness of the laws.

No-fault auto insurance was developed 40 years ago by RobertKeeton and Jeffrey O'Connell, two law school professors whobelieved it would create a more efficient alternative to the tortsystem by reducing wasteful litigation costs and allowingpolicyholders to quickly collect lost wages and medical benefitsafter an auto accident without regard to fault.

Early on, many states experienced cost savings, and no-faultseemed full of promise. Over time, however, some states' lawsproduced unintended negative consequences. While the systemintended to clear the court dockets of minor lawsuits, courtdockets have become more cluttered because of weak litigationthresholds. One of the central objectives of the no-fault conceptas envisioned by its creators was to eliminate litigation from theclaims payment process. But the legislation that implemented theconcept invariably contained provisions that allowed accidentvictims to bring lawsuits for noneconomic damages if certain“thresholds” were breached. Some statutes defined thresholds inmonetary terms (i.e., an accident victim could sue for pain andsuffering if his total medical expenses exceeded a certain amount);others contained “verbal” thresholds that allowed victims to filelawsuits based on the supposed life-altering effects of theirinjuries. Thanks to the influence of the trial bar, some no-faultstates ended up with notoriously weak thresholds—monetary as wellas verbal—that has had the predictable effect of generatingnumerous and costly lawsuits.

Related: Read the article “Insurance Groups StressNeed for N.Y. No-Fault Reform” by Phil Gusman.

In other states, an even bigger problem is rampant: fraud andabuse of the PIP system at a time when medical costs areskyrocketing.

In the past couple of years, legislators and regulators inseveral no-fault states, including New Jersey, New York, Floridaand Michigan, have begun discussions regarding no-fault.

New Jersey

In New Jersey, the passage of auto insurance reform in 2003 waswelcomed to replace a system that was on the verge of collapse.Several national insurers that had threatened to leave the stateinstead remained other major insurers entered the market,increasing competition and choice for New Jersey drivers.

Less than a decade later, New Jersey's autoinsurance landscape has become pockmarked with new challenges,especially the spiraling out-of-control cost of PIP benefits.

When the legislature enacted auto insurance reform, lawmakersput aside the issue of PIP reform. This has been an expensivedecision. Recent research found that the PIP healthcare benefit inNew Jersey has cost $1.23 for every premium dollar paid bypolicyholders since 2009, elevating the state to the second highestaverage PIP claim costs in the nation. This research also foundthat questionable claims increased 40 percent from 2007 to2009.

Related: Read the article “Industry Backs New YorkNo-Fault Reform Bill; Fla. Also Pushing For Change To Prevent'Rampant' Abuse” by Chad Hemenway.

In an effort to hold down costs, the state adopted a feeschedule limiting the amount insurers have to pay for commonmedical treatments associated with car accidents. The state'smedical society took issue with the change and sued to stop itsimplementation, but last November the state Supreme Court handeddown its ruling against the medical society.

The New Jersey Dept. of Banking and Insurance has proposed a setof regulatory reforms aimed at addressing cost drivers in the autoinsurance personal injury protection system. These proposed reformsinclude a revised and expanded medical fee schedule, reform of thearbitration system for disputed medical bills and PIP vendorrequirements. The goals of expanding the fee schedule includereducing billing disputes, controlling costs and enhancingpredictability for the auto insurance system. Under the revisedschedule, rates would be higher than those paid by other medicalbill payers such as Medicare, Medicaid and private healthinsurance. The arbitration proposal includes guidelines for theaward of attorneys' fees to bring them in line with the amount indispute and the amount awarded.

New York

The situation in New York bears some similarity to that ofneighboring New Jersey, as New Yorkers saw the average no-fault claim increase nearly 60 percent between2004 and 2009, with nearly 36 percent of all no-fault claimcosts in New York classified as fraud. According to the InsuranceInformation Institute and the Insurance Research Council, no-faultfraud and abuse in 2009 alone cost New Yorkers approximately $229million.

New York lawmakers have worked on strengthening the rulesgoverning no-fault, but getting needed reforms enacted has proven achallenge. Industry groups, including NAMIC, support acomprehensive approach along the lines of what has been proposed bySen. James Seward, the chairman of the Senate Insurance Committee.Legislation he filed this year (S-2816) would enact provisions suchas mandatory arbitration, streamlined decertification of medicalproviders that commit fraud, modification of the 30-day claimpreclusion rule and establishment of medical treatment guidelines.Superintendent of Insurance James Wrynn joined in the fight forreform by proposing that people who file PIP claims be required toprove their treatments were medically necessary. On Wrynn's wishlist for reform is to make it easier for insurers to stop paymentsto clinics that are being investigated.

Florida

Florida's legislators have been meeting in committee sinceSeptember, a prelude to the 2012 legislative session that begins inJanuary. While no-fault reform has long been on the legislativeradar in Florida, legislator interest was heightened with therelease this past April of a report from the Office of InsuranceRegulation showing that the costs of the PIP system are rapidlyrising.

According to the OIR's report, PIP payoutshave increased from roughly $1.5 billion in 2008 to $2.5 billion in2010. The report also found that between 2006 and 2010 the numberof pending lawsuits at year end increased by 387 percent, while thenumber of settlements increased 315 percent. The report alsoindicated that Florida's PIP pure premium, which is the amount ofpremium needed to cover losses, rose by 50 percent, from just under$100 per car at the end of 2008 to more than $150 in the thirdquarter of 2010.

Gov. Rick Scott and the state's CFO Jeff Atwater have expressedan interest in reforming or even repealing PIP. According todocuments obtained by the South Florida Sun Sentinel, thegovernor's “legislative staff laid out preliminary priorities inAugust, with PIP topping the list.” Driving the governor's effortis his belief that PIP reform would be one way to make good on hiscampaign promise of tort reform. Insurance Commissioner KevinMcCarty and the Florida Insurance Council also have called forchanges to the system. On the legislative side, the state's SenateBanking & Insurance Committee released in September itsbackground report on PIP that includes important data on the systemand identifies major problems and issues. However, it does notcontain specific legislative recommendations.

Michigan

In Michigan, Gov. Rick Snyder is determined to strengthen the state'seconomy by drawing in new business through the creation of a moreamicable business environment. While he may not be talking boldlyabout reform of his state's auto insurance system, he is personallyleading the reform conversation.

Related: Read Neil Alldredge's previous column“Legislative Wrap Up.”

Michigan's no-fault system is the model that other states shouldemulate but with a few significant exceptions: Michigan does notcap medical benefits under PIP; there is no medical fee schedule;and the tort thresholds are low. According to Kevin Dorsey, A.M.Best's senior financial analyst, Michigan consumers are not onlyconcerned about the system's fraud, abuse, overuse andover-billing, they are also hungry for more reasonable rates. Andconsumers could very well get what they want. This September, Rep.Pete Lund introduced HB 4936 that would repeal the mandatedpurchase of unlimited lifetime medical coverage. Instead, Michigandrivers would have the choice of four options for medical coverage:$250,000, $500,000, $1 million or $5 million. Yet should thelegislation become law, Michigan would still retain the title of“most generous state in the union” for no-fault medicalcoverage.

Four decades of experience have taught us that creating andimplementing a functional no-fault system is no simple matter, butthe system can and does work as long as there are safeguardsagainst fraud and abuse built in and the loopholes are closed. Fiveyears ago, NAMIC published “Auto Insurance Reform Options: How toChange State Tort and No-Fault Laws to Reduce Premiums and IncreaseConsumer Choice,” a public policy paper that sought to bring lightto the reform versus repeal debate. The bottom line was evident:the health of a state's auto insurance system depends less onwhether it is no-fault or tort than whether the system has othercharacteristics that keep costs in check.

While NAMIC doesn't have a crystal ball, we are fairly certainthat 2012 could be the year of serious debate on and reform ofno-fault auto insurance.