Over the last several years, pervasive fraud in Florida’sno-fault auto insurance system has cost consumers nearly $1billion. Fraud costs in the Sunshine State have been rapidlyexploding and are far worse than in other states. As a result,Florida has gained the dubious distinction of being the nation’smost fraud-riddled state. According to the National Insurance CrimeBureau (NICB), staged accidents and certain unscrupulousmedical providers and unethical personal injury attorneys havelanded four Florida cities in the U.S.’s top 10 personal injuryfraud hotbeds: Tampa, Miami, Orlando and Hialeah.

Florida’s no-fault system was created with the intent ofproviding affordable, quick and fair compensation to accidentvictims, without regard to fault. Regrettably, this system iscompletely broken and plagued by fraud.

Rampant no-fault fraud in Florida will continue to increaseinsurance costs for consumers if not swiftly brought under control.While important change is always difficult to accomplish, there isa growing recognition among policy leaders and insurance consumersin Florida that the current no-fault system is unsustainable, andhonest consumers and businesses need to be better protected.

At one time, insurance fraud was often an individual crime. Nowit has become an organized crime. Networks of dishonestindividuals, fraudulent healthcare clinics that provide treatmentto injured claimants and unscrupulous attorneys have bandedtogether in organized rackets to fleece the system and Florida’sinsurance community. According to the Florida Sheriffs’ Assn.,undercover investigations have revealed that many participants instaged accidents are part of these larger groups. The staged crashis just the first step in the overall scheme to defraud insurancecompanies, which harms honest drivers.

Related: Read the article "Upstaging the Staged Accident" byChristopher Tidball.

Fraudulent healthcare clinics perform diagnostic tests on thoseinvolved in staged accidents and unnecessary diagnostic tests onthose involved in legitimate accidents, taking business away fromlegitimate providers. Many dishonest claimants also refuse toappear for scheduled exams or answer questions under oath abouttheir treatment. In addition, there are fraudulent trial lawyerswho enrich themselves with huge attorney fees while leaving injuredvictims with less.

The number of no-fault auto lawsuits, which are almost all filedby healthcare providers, has more than quadrupled in Florida overthe last several years; plaintiff attorney fees have skyrocketed aswell, which in turn spurs rising insurance rates. Rampant fraud hasled to a two-tiered system, with most honest Florida consumerspaying for the unnecessary medical bills and sky-high attorney feesof those taking advantage of the system.

Florida drivers currently pay the highest auto liabilityinsurance premium in the nation, 56 percent more than consumers inother states. Average annual auto premiums in this state run $736,compared to a U.S. average of $471. Not only do Florida consumerssuffer the highest costs for liability coverage in the U.S., butthey also get stuck paying the most relative to what they earn. Theaverage Florida household spends more than 1.6 percent of itsincome on auto liability insurance, almost twice as much as thenational average of 0.9 percent of household income.

The amount consumers pay for insurance isprimarily determined by the expected number of claims, the cost ofthese claims and settlement expenses. One reason for Florida’s highliability premiums is the fact that its third-party bodily injuryclaim frequency has increased dramatically, rising 19.2 percentfrom 2006 to 2010. In contrast, the frequency for tort states hasremained fairly flat overall and the frequency for other no-faultstates has been declining. The increase in Florida’s bodily injuryclaim frequency is especially apparent beginning in 2008, about thesame time as the start of the financial crisis when total milesdriven fell.

While the number of auto accidents in Florida has beendecreasing, the number of no-fault claims has been increasing alongwith the number and charges for non-emergency medical bills. Thisis inconsistent with no-fault systems that are intended to reducemedical costs, providing first-party benefits in exchange forlimitations on tort rights. The number of claims increased byalmost 5 percent in Florida compared to a decrease in otherno-fault states.

Related: Read the article "The 2012 Session: Deja-Vu All OverAgain" by William Stander.

Insurance fraud impacts all Floridians by raising the averagecost of claims, and it tends to get worse during times of financialdifficulty. This state’s no-fault claim costs, which primarily payfor medical care, have risen at twice the rate of claim costs foundin other no-fault states and the cost of medical care. The injurycosts in Florida began materializing at a dramatically increasingrate in 2008. Overall, Florida’s average loss per insured car (theclaim frequency and cost combined) has increased at a rate morethan double other no-fault states. Florida’s injury costs have evenoutpaced the combined results for Michigan, New Jersey and NewYork, three other states known for extreme no-fault insurancefraud.

Despite Florida’s premium payments being highest in the nation,they are increasingly inadequate in relation to skyrocketing fraudcosts. Over the last 4 years, the state’s total auto liabilitylosses and loss adjustment expenses (LAE) to investigate and settleclaims, as well as underwriting expenses to operate the business,have grown so much that the premiums collected by insurers have notbeen able to cover these amounts. This has resulted in a $1.2billion deficiency in 2010, impacting Florida consumers; risingconsumer costs could result in even larger gaps over time.

As long as the number and amount of fraudulent claims continuesto escalate in Florida, higher liability loss trends are likely togo on as well. In 2010, the total liability losses and LAE were $8billion; about one-third of this amount ($2.68 billion) reflectsno-fault losses and LAE. If recent increases persist, totalliability losses and LAE are expected to reach $9.1 billion in2013. No-fault losses and LAE are anticipated to increase fasterdue to rapidly rising fraud costs. By 2013, no-fault losses and LAEwill likely grow to at least $3.67 billion, or 40 percent of totalliability losses and LAE.

Bringing no-fault costs under control willrequire transforming the liability system. Although Florida’sno-fault system is complicated, the areas rife with fraud are easyto identify and the solutions straightforward. There are fouressential fraud-fighting fixes that can be enacted quickly:

1. Allow a reasonable amount of time to investigate suspiciousclaims. Although the vast majority of insurance claims arecurrently paid in less than 30 days, fraudulent attorneys andclaimants have learned to game the system with false delays andthreats of bad faith legal action to demand extra bounties.
2. Eliminate incentives for frivolous no-fault lawsuits by placingcaps on attorney fees. Florida’s courts are now clogged withno-fault litigation because trial lawyers filing no-fault claimsare routinely getting rewarded with bounties up to $500 per hourfor their work. Not surprisingly, unscrupulous attorneys can spendyears litigating disputes involving minimal amounts.
3. Provide greater oversight of medical clinics by allowingprivate on-site inspections of premises to ensure the services arereal. Fraudulent medical clinics are using loopholes in the state’sclinic licensing laws to avoid oversight, steal business fromlegitimate hospitals and medical providers, and focus on buildingup unnecessary services with or without the knowledge of theclaimant.
4. Prevent fraudulent unnecessary medical treatment byestablishing reasonable treatment limits. Overuse of unnecessarynon-emergency care provided by various health providers andovercharges by providers are key cost drivers in the Floridano-fault system, contributing to high no-fault losses.

Related: Read the article "A Look Back at 2011" by Joan E.Collier.

Transforming Florida’s no-fault system will bring numerousbenefits to consumers. Skyrocketing costs will be brought undercontrol and slow the rate of premium growth. With the incentive ofout-of-proportion fees removed, there will be less litigation ofno-fault claims, further reducing costs to the system. Fraudulentmedical clinics and providers will no longer be able to evadeinvestigative tools such as examinations under oath and facilityinspections, allowing fraudulent claims to be detected or deterredaltogether. And reasonable limits on non-emergency care will notonly preserve benefits for acute emergency care, but reduce costsby removing incentives for overuse of non-emergency medicalservices.

The vast majority of Florida drivers are honest insuranceconsumers, and they do not deserve to pay the nation’s highestprices due to rampant auto insurance fraud by a relatively few badactors. It is time to get Florida’s rampant auto fraud undercontrol.