Filed Under:Agent Broker, Coverage & Policy Issues

The $1 Billion Problem

Transforming Florida’s no-fault system a priority in 2012

Over the last several years, pervasive fraud in Florida’s no-fault auto insurance system has cost consumers nearly $1 billion. Fraud costs in the Sunshine State have been rapidly exploding and are far worse than in other states. As a result, Florida has gained the dubious distinction of being the nation’s most fraud-riddled state. According to the National Insurance Crime Bureau (NICB), staged accidents and certain unscrupulous medical providers and unethical personal injury attorneys have landed four Florida cities in the U.S.’s top 10 personal injury fraud hotbeds: Tampa, Miami, Orlando and Hialeah.

Florida’s no-fault system was created with the intent of providing affordable, quick and fair compensation to accident victims, without regard to fault. Regrettably, this system is completely broken and plagued by fraud.

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

At one time, insurance fraud was often an individual crime. Now it has become an organized crime. Networks of dishonest individuals, fraudulent healthcare clinics that provide treatment to injured claimants and unscrupulous attorneys have banded together in organized rackets to fleece the system and Florida’s insurance community. According to the Florida Sheriffs’ Assn., undercover investigations have revealed that many participants in staged accidents are part of these larger groups. The staged crash is just the first step in the overall scheme to defraud insurance companies, which harms honest drivers.

Related: Read the article "Upstaging the Staged Accident" by Christopher Tidball.

Fraudulent healthcare clinics perform diagnostic tests on those involved in staged accidents and unnecessary diagnostic tests on those involved in legitimate accidents, taking business away from legitimate providers. Many dishonest claimants also refuse to appear for scheduled exams or answer questions under oath about their treatment. In addition, there are fraudulent trial lawyers who enrich themselves with huge attorney fees while leaving injured victims with less.

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

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

The amount consumers pay for insurance is primarily determined by the expected number of claims, the cost of these claims and settlement expenses. One reason for Florida’s high liability premiums is the fact that its third-party bodily injury claim frequency has increased dramatically, rising 19.2 percent from 2006 to 2010. In contrast, the frequency for tort states has remained fairly flat overall and the frequency for other no-fault states has been declining. The increase in Florida’s bodily injury claim frequency is especially apparent beginning in 2008, about the same time as the start of the financial crisis when total miles driven fell.

While the number of auto accidents in Florida has been decreasing, the number of no-fault claims has been increasing along with the number and charges for non-emergency medical bills. This is inconsistent with no-fault systems that are intended to reduce medical costs, providing first-party benefits in exchange for limitations on tort rights. The number of claims increased by almost 5 percent in Florida compared to a decrease in other no-fault states.

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

Insurance fraud impacts all Floridians by raising the average cost of claims, and it tends to get worse during times of financial difficulty. This state’s no-fault claim costs, which primarily pay for medical care, have risen at twice the rate of claim costs found in other no-fault states and the cost of medical care. The injury costs in Florida began materializing at a dramatically increasing rate in 2008. Overall, Florida’s average loss per insured car (the claim frequency and cost combined) has increased at a rate more than double other no-fault states. Florida’s injury costs have even outpaced the combined results for Michigan, New Jersey and New York, three other states known for extreme no-fault insurance fraud.

Despite Florida’s premium payments being highest in the nation, they are increasingly inadequate in relation to skyrocketing fraud costs. Over the last 4 years, the state’s total auto liability losses and loss adjustment expenses (LAE) to investigate and settle claims, as well as underwriting expenses to operate the business, have grown so much that the premiums collected by insurers have not been able to cover these amounts. This has resulted in a $1.2 billion deficiency in 2010, impacting Florida consumers; rising consumer costs could result in even larger gaps over time.

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

Bringing no-fault costs under control will require transforming the liability system. Although Florida’s no-fault system is complicated, the areas rife with fraud are easy to identify and the solutions straightforward. There are four essential fraud-fighting fixes that can be enacted quickly:

  1. Allow a reasonable amount of time to investigate suspicious claims. Although the vast majority of insurance claims are currently paid in less than 30 days, fraudulent attorneys and claimants have learned to game the system with false delays and threats of bad faith legal action to demand extra bounties.
  2. Eliminate incentives for frivolous no-fault lawsuits by placing caps on attorney fees. Florida’s courts are now clogged with no-fault litigation because trial lawyers filing no-fault claims are routinely getting rewarded with bounties up to $500 per hour for their work. Not surprisingly, unscrupulous attorneys can spend years litigating disputes involving minimal amounts.
  3. Provide greater oversight of medical clinics by allowing private on-site inspections of premises to ensure the services are real. Fraudulent medical clinics are using loopholes in the state’s clinic licensing laws to avoid oversight, steal business from legitimate hospitals and medical providers, and focus on building up unnecessary services with or without the knowledge of the claimant.
  4. Prevent fraudulent unnecessary medical treatment by establishing reasonable treatment limits. Overuse of unnecessary non-emergency care provided by various health providers and overcharges by providers are key cost drivers in the Florida no-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 numerous benefits to consumers. Skyrocketing costs will be brought under control and slow the rate of premium growth. With the incentive of out-of-proportion fees removed, there will be less litigation of no-fault claims, further reducing costs to the system. Fraudulent medical clinics and providers will no longer be able to evade investigative tools such as examinations under oath and facility inspections, allowing fraudulent claims to be detected or deterred altogether. And reasonable limits on non-emergency care will not only preserve benefits for acute emergency care, but reduce costs by removing incentives for overuse of non-emergency medical services.

The vast majority of Florida drivers are honest insurance consumers, and they do not deserve to pay the nation’s highest prices due to rampant auto insurance fraud by a relatively few bad actors. It is time to get Florida’s rampant auto fraud under control.

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