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The Verdict Is In

What Happened To No-Fault Insurance?

Tony Francis, MD, Orthopaedic Surgery, 01:47AM Jun 12, 2013

I was under the impression that "no fault" automobile insurance was a raving success. So it was a surprise to find a paper published in DePaul Law Review (2012) which indicated "no fault" was in a state of demise. This was news to me. There are several reports on the 'Net recently confirming it. Of course, this should be of interest to those who propose to convert medical malpractice into a kind of "no fault" system.

I suppose "no fault" automobile insurance was in response to the change in the way tort cases were tried in the 1960s to the 1980s. At that time, the old US Common Law rule of "contributory negligence" began to give way to the more liberal "comparative negligence" doctrine. Under the old "contributory" scheme, if the plaintiff could be shown to have contributed even 1% to the underlying event or damages, the plaintiff could not recover. Under comparative negligence rules, the amount of contribution between plaintiff and defendant became a question for trier of fact. Then the amount of damages were adjusted based on the comparative fault. There are a few states which still have contributory negligence rules. Maryland and Alabama come to mind. Nowadays, most states have some form of comparative negligence. The introduction of "no fault" automobile insurance closely paralleled the adoption of comparative negligence. The paper mentions this in passing. The idea was to divert as many cases as possible from tort litigation with a goal of decreased overall costs. Jury trials are exceptionally expensive and inefficient. If the litigants could avoid hiring attorneys, so much the better. However, it is now known that the promises of less costs were never serious. Costs of no fault have escalated through the years.

Over time, the number of no-fault claims having attorney representation has increased. This defeats the original purpose. The amount of settlement in cases tried in front of a jury based on tort theory and those with "no fault" settlement are roughly similar. This is called "damage convergence." It is the product of thousands of settlements over time for similar kinds of damages and injuries. At the same time, the number of cases actually tried has decreased. The settlements became "cookbook" over time. The same kind of damage or injury is worth so much, based on previous settlements. Surprisingly, (or perhaps not) no fault costs have escalated and thus become politically unpopular.

It is also mentioned that no fault states have more motor vehicle accidents. No explanation appears to be forthcoming for this empiric observation. In the early 20th century the other great trend away from pure tort was the worker's comp movement. A comparison is made between "no fault" and worker's comp. In the 1960s and 1970s, it was believed "no fault" would eventually replace all tort. That didn't occur. However, it remains unclear why no-fault has been a failure. It is somewhat of a mystery. Several theories are advanced, but no definitive answer is provided. Still, it is an interesting read.

From the paper

Rumor has it that in 1896 there were only four motor vehicles in all of the United States and two, improbably, collided, thus ushering in the era of auto accidents on American soil—a problem that plagues us still.  Automobiles are central to the American way of life, “permit[ ing] an impatient people to conquer space and time.” Yet, as many of us know too well, they sometimes collide, and when they do, the cumulative toll they take is breathtaking. Since the time of that first auto accident, nearly 3.5 million Americans have perished, and today, auto collisions injure 2.5 million Americans per year, constitute the leading cause of death for those from age five to thirty-four, and kill roughly 35,000 Americans annually. Their practical influence on tort law is unparalleled, accounting for the majority of all injury claims and three-quarters of all injury damage payouts. And their economic cost is substantial, accounting for expenditures of $255 billion annually—or, to put that sum in perspective, about as much as the federal government spent in 2010 on education and transportation, combined. It is no wonder, then, that how to pay for auto accidents—and lessen their effect—has long been a subject of intense debate and a matter of profound concern. In the second half of the last century, an innovative “no-fault” plan by Professors Robert Keeton and Jeffrey O’Connell seemed to supply the answer: it seemed to represent a workable solution to the age-old question of how to deliver more equitable, more efficient, more swift, and more certain compensation to auto accident victims in the United States.

Under the Keeton–O’Connell plan, as it came to be known, tort law—with its individualized determination of fault and idiosyncratic calculation of damages—would be jettisoned for all but the most seriously hurt, and all auto accident victims would instead receive prompt, albeit partial, compensation from their own (meaning first-party) insurer. As the no-fault concept gained traction in the late 1960s and early 1970s, its proponents believed that replacing tort with no-fault legislation was not only something that should be done; it was also something that could be done. It was, as President Richard Nixon boldly declared, “an idea whose time has come.” During a roughly seven year period from 1970 to 1977, some type of no-fault legislation seemed perennially on the verge of widespread enactment. In 1971, Massachusetts’s insurance commissioner predicted that “[n]o-fault will sweep the country,” a prediction Business Week said many viewed as “a simple statement of fact.” In 1972, Time ran an article entitled No-Fault Catches Fire and quoted a no-fault foe conceding that fighting the legislation had become a “losing cause.” In 1973, Senator Philip A. Hart of Michigan opened hearings on an ambitious national no-fault bill by declaring, “As of now, there is general agreement that we must change our present liability-based insurance system with its inefficiencies and inadequacies and inequities, and go to a no-fault plan.” 

Most remarkable of all, even Benjamin Marcus, a co-founder of the American Trial Lawyers Association (ATLA)—the organization that some say did more than any other to stymie no-fault’s adoption— at least privately noted, “We feel it is probable that when the dust has all cleared, No Fault will be conceded by all to be substantially speedier, less wasteful, and more fair than our present system.” Meanwhile, no-fault enjoyed the vocal and consistent support of the nation’s most respected newspaper editorial boards. It received at least the wavering support of the American people. And it was the subject of a flurry of legislative activity. At the federal level, a fewmuscular no-fault bills made it to the Senate floor, and one even passed in 1974 before dying in the House of Representatives. But it was in the states, not in Congress, that no-fault really came of age. By 1974, all states had considered no-fault legislation.  And by 1976, little more than a decade after the modern no-fault movement began, more than two dozen states—encompassing the majority of Americans— had actually enacted some type of no-fault legislation, and sixteen states had enacted laws restricting motorists’ right to sue.  Then something remarkable happened: The no-fault movement stopped, quite abruptly, in its tracks. No new state has enacted a no fault regime since 1976.

A handful of states (Colorado, Connecticut, Georgia, Nevada, New Jersey, and Pennsylvania) have, in recent years, repealed their mandatory no-fault legislation. On California’s ballot in 1988 and 1996, voters twice rejected no-fault initiatives, the first time so convincingly the vote was dubbed a “massacre.” And appearing on Arizona’s ballot in 1990, choice no-fault was trounced, receiving a pathetic 15% of votes cast. In short, in the span of one decade, automobile no-fault went from being widely viewed as “inevitable” to having, it is said, “breathed its last breath,” become something of a “dead letter,” and met its sad “demise.” Why? It is a question of significant import. Automobile no-fault legislation is the second most ambitious alternative compensation scheme ever enacted in the United States. In some respects, the no-fault concept itself (quite apart from any plaintiffs’ lawyers’ mischievous tinkering) did trigger problems that weren’t anticipated. There is some evidence, for example, that no-fault is associated with increased fatality rates—a problem no-fault supporters did not predict. It is also true that the plaintiffs’ bar lobbied hard against no-fault legislation—and sometimes won—defeating the legislation altogether. Meanwhile, even when no-fault managed to squeak by over plaintiffs’ lawyers’ vehement objections, the plaintiffs’ bar often demanded, and sometimes obtained, certain concessions that made it harder for no-fault legislation to achieve its stated cost-cutting, courtclearing, and fraud-fighting goals. “The trial lawyers water it down, shoot it in the kneecap, and then protest that it doesn’t work very well,” no-fault architect Jeffrey O’Connell lamented.

But even while the failed-on-the-merits/trial-lawyers-killed-it accounts of no-fault’s failure get much right, they also miss important texture and gloss over interesting puzzles. A careful review of the voluminous legislative record surrounding no-fault, for example, underscores that even if one accepts that no-fault failed because its costs were higher than anticipated, arguably the prime culprit for that was not any “shot fired” by hostile trial lawyers but rather auto insurers’ primary-payer status. And that primary status, we will see, was not in the original Keeton–O’Connell plan; nor was it championed by the plaintiffs’ lawyer lobby. That no-fault feature, which arguably did more than any other to drive up the reform’s cost, was, rather, demanded by those within the insurance industry, ostensibly supportive of the plan. Furthermore, even if it is true that no-fault failed on the merits because promised insurance premium reductions did not materialize, a question remains: Why did sophisticated no-fault advocates sell the legislation to the public on that basis—particularly since promising rate reductions gave no-fault critics an objective yardstick against which the legislation could be judged and no-fault’s ability to cut premiums was not clear. Indeed, throughout the early 1970s, many prominent (now we see prescient) voices within the insurance industry cautioned against pinning no-fault’s success to rate reductions, repeatedly warning that rate reductions were speculative and, even if they came to pass, would represent “only a fraction of what the ardent advocates seem to be promising.” And though insurers’ warnings might be discounted,  even unconflicted no-fault supporters appeared to recognize that they were overstating this part of the case, privately conceding, the Associated Press reported, “that the money saving claims were a come-on and not realistic.”  Given this obvious risk and uncertainty, one must inquire why certain no-fault proponents nevertheless made bold and insistent cost-cutting claims.

Compared to Worker's Comp

Between 1910 and 1921, with what was described at the time as a kind of “magical rapidity,” nearly all states jettisoned the tort system for workplace accidents and replaced tort with an administrative scheme, which (like auto no-fault) was something of a compromise. In place of tort’s slow, uncertain, but theoretically complete recovery, workers’ compensation gave injured employees prompt, guaranteed— but limited—relief. The history of the workers’ compensation movement is rich, thickly written, and in some ways contested. But it seems clear that when workers’ compensation swept the nation in the early years of the last century, at least four powerful forces converged. First, workers’ compensation came about during the Progressive Era, a time when there was a flood of child labor and women’s rights legislation, a number of health and safety reforms, a broad reassessment of the state’s police power obligations, and a pervasive confidence in administrative competence. Second, it was adopted at a time when Americans’ perception of workplace accidents subtly shifted. Americans came to believe that accidents were not just the unhappy consequence of individual carelessness; accidents, instead, came to be viewed as predictable and inevitable, making it more sensible for the loss to be borne collectively. Third, the legislation swept the nation when workplace injuries were on the rise, and the human story behind these otherwise dry statistics was artfully conveyed to the American public, who perceived a crisis in their midst. Fourth and finally, these developments came together when there was relatively limited first-party insurance and profound dissatisfaction with the private law status quo, burdened as it was with the “unholy trinity” of employer defenses, which created serious and often insurmountable obstacles to workers’ recovery.

So too, initially, with automobile no-fault legislation. No-fault legislation burst onto the national stage as at least four factors coalesced to open a unique policy window for its enactment. First, as Rabin points out, no-fault—embraced by consumer groups as necessary consumer legislation—got its hearing during the “Public Interest Era” of the late 1960s, a time when there was a surge of support for consumer and environmental legislation and when at least twenty-five consumer, environmental, and social regulatory laws won congressional passage. Second, it was a time when enterprise liability, or the “insurance rationale,” was in the vanguard, and there was a keen sense that the fault requirement had outlived its usefulness. Third, the no-fault movement came to the fore at the precise moment when the auto fatality rate was peaking and the carnage caused by car crashes briefly captured the nation’s attention. And finally, it was a time when there was relatively little first-party insurance (at least as compared to later decades), and there was also deep dissatisfaction with both the limits and the excesses of traditional tort.

Convergence of claims

I take as my point of departure John Witt’s “convergence thesis.” Writing for a previous Clifford Symposium, Witt suggested that, for certain classes of recurring torts, the on-the-ground settlement of claims tends to “converge[ ] with the practice of publicly administered systems.” Over time, he observed, tort’s procedures become progressively more routinized and less individualistic, idiosyncratic, and adversarial. I agree, and my past work on settlement mills—which process mostly auto claims in high volumes—lends support to Witt’s claim. But in carefully examining auto claims data, I take Witt’s suggestion a significant step further. The data suggest that it is not just the on-the-ground practice of processing tort claims that has become more routinized. Rather both the tort system and the no-fault systems have changed substantially. And not just their processes but their outputs have actually converged. No-fault has become increasingly lawyer driven and adversarial. All the while, the tort system in the automobile context has become less litigious and has started to deliver broader yet shallower compensation— much like its former foe. Over time, in other words, the two seemingly diametrically opposed systems have reached something of an equilibrium. They have become progressively more and more alike—raising provocative questions about no-fault’s legacy and certainly, in recent decades, making the case to jettison one in favor of the other a tougher sell.

Adversarial Equilibrium

We take as a starting point the observation that automobile no-fault plans have become, by virtually any measure, gradually less effective over time. In nearly every state, the costs of no-fault have progressively risen, and, more important for our present purposes, no-fault’s benefits (whether in deterring fraud, limiting third-party claims, reducing court congestion, or curbing lawyer retention) have progressively diminished. Why did no-fault’s benefits erode over time? In large part the answer is simple. Most states limited access to the tort system via monetary thresholds, and, except in Hawaii, these thresholds were not indexed for inflation. As time went by, they became easier to pierce. As more thresholds were pierced, more claims were routed to the tort system, with the costs, delays, and inefficiencies that that entails.  Fair enough, but this explanation is also incomplete. The reason why some states with verbal thresholds, which are not susceptible to monetary inflation, have seen thresholds erode, bodily injury claims rise, and fraud mount for example, remains something of a mystery. Likewise, it is also true that, over the past three decades, the tort system in the automobile context has become gradually less selective in its compensation, less generous in its awards, and less adversarial in its operation. Retaining attorneys At the time no-fault was enacted, it was assumed that no-fault processes would be so simple that relatively few claimants would retain lawyers. But data reproduced below reveal that, between 1977 and 1997, the percentage of PIP claimants represented by attorneys nearly doubled, from 17% to 31%, while the percentage of bodily injury claimants retaining counsel has stayed roughly the same, meaning—once again—that the distance between the two systems has shrunk considerably.

Fraud

Finally, the incidence of fraud continues this now-familiar pattern. Recall that when no-fault was first enacted, it was touted as a way to “minimize inducements to dishonesty.” No-fault proponents suggested both that eliminating noneconomic damages would reduce the incentive to build one’s claim and that the ongoing, first-party relationship between the insurer and policyholder would give both parties “good reason to conduct themselves honestly and fairly.” Recall too that soon after no-fault was adopted, there were promising indications that the reform had worked; fraud, observers believed, was on the wane. But now, when we consider a hallmark of fraudulent claiming— seeking compensation for hard-to-verify soft-tissue injuries—the two systems, fault and no-fault, again converge. Though claims seeking compensation for soft-tissue injuries were, in 1987, much less prevalent in no-fault states than they were in tort states, between 1987 and 2007, the gap between the two systems closed dramatically.

To download the paper:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2133393

About This Blog

We will discuss current legal issues related to the practice of medicine.

Disclosure: Tony Francis, MD, JD, has disclosed no relevant financial relationships.

  • Tony Francis

    Graduated with MD degree in 1977, performed residency in Orthopedic Surgery,  Graduated with a JD and LLD in 1987. Graduated with Master of Science in Quantum Mechanics and Computational Chemistry in 1999.

    Director of  "Legal Medicine Research" and writes advisory reports for US Federal Judges. 

     

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