Over the past few years, increasing frustration with fraud, abuse and massive cost increases in several jurisdictions has forced legislators and regulators to take a serious look at reform of 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 to litigation thresholds, personal injury protection (PIP) limits and other factors such as the threat of lawsuits for "bad-faith"—all of which influence the effectiveness of the laws.
No-fault auto insurance was developed 40 years ago by Robert Keeton and Jeffrey O’Connell, two law school professors who believed it would create a more efficient alternative to the tort system by reducing wasteful litigation costs and allowing policyholders to quickly collect lost wages and medical benefits after an auto accident without regard to fault.
Early on, many states experienced cost savings, and no-fault seemed full of promise. Over time, however, some states’ laws produced unintended negative consequences. While the system intended to clear the court dockets of minor lawsuits, court dockets have become more cluttered because of weak litigation thresholds. One of the central objectives of the no-fault concept as envisioned by its creators was to eliminate litigation from the claims payment process. But the legislation that implemented the concept invariably contained provisions that allowed accident victims to bring lawsuits for noneconomic damages if certain "thresholds" were breached. Some statutes defined thresholds in monetary terms (i.e., an accident victim could sue for pain and suffering if his total medical expenses exceeded a certain amount); others contained "verbal" thresholds that allowed victims to file lawsuits based on the supposed life-altering effects of their injuries. Thanks to the influence of the trial bar, some no-fault states ended up with notoriously weak thresholds—monetary as well as verbal—that has had the predictable effect of generating numerous and costly lawsuits.
In other states, an even bigger problem is rampant: fraud and abuse of the PIP system at a time when medical costs are skyrocketing.
In the past couple of years, legislators and regulators in several no-fault states, including New Jersey, New York, Florida and Michigan, have begun discussions regarding no-fault.
In New Jersey, the passage of auto insurance reform in 2003 was welcomed to replace a system that was on the verge of collapse. Several national insurers that had threatened to leave the state instead remained other major insurers entered the market, increasing competition and choice for New Jersey drivers.
Less than a decade later, New Jersey’s auto insurance landscape has become pockmarked with new challenges, especially the spiraling out-of-control cost of PIP benefits.
When the legislature enacted auto insurance reform, lawmakers put aside the issue of PIP reform. This has been an expensive decision. Recent research found that the PIP healthcare benefit in New Jersey has cost $1.23 for every premium dollar paid by policyholders since 2009, elevating the state to the second highest average PIP claim costs in the nation. This research also found that questionable claims increased 40 percent from 2007 to 2009.
In an effort to hold down costs, the state adopted a fee schedule limiting the amount insurers have to pay for common medical treatments associated with car accidents. The state’s medical society took issue with the change and sued to stop its implementation, but last November the state Supreme Court handed down its ruling against the medical society.
The New Jersey Dept. of Banking and Insurance has proposed a set of regulatory reforms aimed at addressing cost drivers in the auto insurance personal injury protection system. These proposed reforms include a revised and expanded medical fee schedule, reform of the arbitration system for disputed medical bills and PIP vendor requirements. The goals of expanding the fee schedule include reducing billing disputes, controlling costs and enhancing predictability for the auto insurance system. Under the revised schedule, rates would be higher than those paid by other medical bill payers such as Medicare, Medicaid and private health insurance. The arbitration proposal includes guidelines for the award of attorneys’ fees to bring them in line with the amount in dispute and the amount awarded.
The situation in New York bears some similarity to that of neighboring New Jersey, as New Yorkers saw the average no-fault claim increase nearly 60 percent between 2004 and 2009, with nearly 36 percent of all no-fault claim costs in New York classified as fraud. According to the Insurance Information Institute and the Insurance Research Council, no-fault fraud and abuse in 2009 alone cost New Yorkers approximately $229 million.
New York lawmakers have worked on strengthening the rules governing no-fault, but getting needed reforms enacted has proven a challenge. Industry groups, including NAMIC, support a comprehensive approach along the lines of what has been proposed by Sen. James Seward, the chairman of the Senate Insurance Committee. Legislation he filed this year (S-2816) would enact provisions such as mandatory arbitration, streamlined decertification of medical providers that commit fraud, modification of the 30-day claim preclusion rule and establishment of medical treatment guidelines. Superintendent of Insurance James Wrynn joined in the fight for reform by proposing that people who file PIP claims be required to prove their treatments were medically necessary. On Wrynn’s wish list for reform is to make it easier for insurers to stop payments to clinics that are being investigated.
Florida’s legislators have been meeting in committee since September, a prelude to the 2012 legislative session that begins in January. While no-fault reform has long been on the legislative radar in Florida, legislator interest was heightened with the release this past April of a report from the Office of Insurance Regulation showing that the costs of the PIP system are rapidly rising.
According to the OIR’s report, PIP payouts have increased from roughly $1.5 billion in 2008 to $2.5 billion in 2010. The report also found that between 2006 and 2010 the number of pending lawsuits at year end increased by 387 percent, while the number of settlements increased 315 percent. The report also indicated that Florida’s PIP pure premium, which is the amount of premium 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 third quarter of 2010.
Gov. Rick Scott and the state’s CFO Jeff Atwater have expressed an interest in reforming or even repealing PIP. According to documents obtained by the South Florida Sun Sentinel, the governor’s "legislative staff laid out preliminary priorities in August, with PIP topping the list." Driving the governor’s effort is his belief that PIP reform would be one way to make good on his campaign promise of tort reform. Insurance Commissioner Kevin McCarty and the Florida Insurance Council also have called for changes to the system. On the legislative side, the state’s Senate Banking & Insurance Committee released in September its background report on PIP that includes important data on the system and identifies major problems and issues. However, it does not contain specific legislative recommendations.
In Michigan, Gov. Rick Snyder is determined to strengthen the state’s economy by drawing in new business through the creation of a more amicable business environment. While he may not be talking boldly about reform of his state’s auto insurance system, he is personally leading the reform conversation.
Michigan’s no-fault system is the model that other states should emulate but with a few significant exceptions: Michigan does not cap 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 only concerned about the system’s fraud, abuse, overuse and over-billing, they are also hungry for more reasonable rates. And consumers could very well get what they want. This September, Rep. Pete Lund introduced HB 4936 that would repeal the mandated purchase of unlimited lifetime medical coverage. Instead, Michigan drivers would have the choice of four options for medical coverage: $250,000, $500,000, $1 million or $5 million. Yet should the legislation become law, Michigan would still retain the title of "most generous state in the union" for no-fault medical coverage.
Four decades of experience have taught us that creating and implementing a functional no-fault system is no simple matter, but the system can and does work as long as there are safeguards against fraud and abuse built in and the loopholes are closed. Five years ago, NAMIC published "Auto Insurance Reform Options: How to Change State Tort and No-Fault Laws to Reduce Premiums and Increase Consumer Choice," a public policy paper that sought to bring light to the reform versus repeal debate. The bottom line was evident: the health of a state’s auto insurance system depends less on whether it is no-fault or tort than whether the system has other characteristics that keep costs in check.
While NAMIC doesn’t have a crystal ball, we are fairly certain that 2012 could be the year of serious debate on and reform of no-fault auto insurance.