No-Fault: It’s a Success in N.Y., Disaster in N.J.

A little more than 15 years ago, as frustrated New York motorists chafed under high insurance rates and a red tape-bound system that delayed accident claims for as long as five years, Gov. Nelson A. Rockefeller signed into law a relatively untried concept called no-fault. The results impressed even the skeptics.

Officials say premiums now rise at a pace slower than inflation, accident victims begin receiving compensation in about two months, and much more of each premium dollar is going back to victims rather than being eaten up by lawyers, accident investigators and bureaucracy.

Just across the Hudson River, New Jersey tried no-fault, too. But the outcome could hardly have been worse.

Highest Premiums

Drivers there pay the nation’s highest average auto insurance premiums and insurers are reluctant to write new policies. As a result, about half the state’s 4 million drivers--including many with impeccable driving records--have been dumped into an assigned-risk pool that is $2 billion in debt.

“We have all the worst aspects of every conceivable system,” said U.S. Rep. James J. Florio (D-N.J.), who recently headed the House insurance subcommittee. Florio, who four years ago branded his state’s no-fault system “an outrage,” said: “I can’t even think of an appropriate term to use now. The problem has become infinitely worse.”

Why one no-fault state would fail so miserably while another succeeds beyond expectations may provide clues to what Californians face if they approve a no-fault initiative on the Nov. 8 ballot.

Proposition 104--one of five initiatives meant to overhaul California’s insurance system--is modeled after the successful New York system and a similar one in Florida, according to the insurance industry, which is spending more than $40 million to win over voters to the no-fault concept. The campaign promises Californians results similar to those in New York: lower premiums, faster settlement of claims and fewer costly and time-consuming lawsuits.

Experts interviewed from around the nation agree that Proposition 104 is likely to speed up claims and reduce litigation while avoiding the problems that have mired New Jersey in insurance quicksand. But compared to most successful no-fault states, including New York, the initiative provides less oversight and regulation of the insurance industry, stingier benefits for accident victims and less opportunity to sue when settlements seem inadequate.

Experience Mixed

Although the initiative also may slow the pace of premium increases beyond the initial 20% cut in liability rates called for in the measure, federal studies show that the experience of no-fault states has been mixed. In states with what are generally considered successful no-fault laws, rates have either gone down or risen more slowly than they had before the laws were enacted. But in states with less successful no-fault measures, rates have actually gone up.

And while all successful no-fault systems have had to undergo major modifications over time, the California initiative was drafted in a way that would make revisions much more difficult.

“The term no-fault doesn’t mean anything. It’s like meat loaf. It depends on what you put into it,” said Roxani Gillespie, California’s insurance commissioner, who said that while her department is neutral on the insurance measures on the November ballot, she personally has problems with all of them.

Roughly half the states have some form of no-fault insurance, although few have joined the ranks since the mid-1970s when poorly drafted laws, such as New Jersey’s, cooled states’ interest. Proposition 104, however, represents a major departure because no state has yet enacted an insurance system through the initiative process.

Under the traditional “tort liability” system used in California and 24 other states, the negligent driver’s insurance company must reimburse the innocent party in an accident. Many who carry minimum coverage or no insurance go uncompensated for injury claims because they cannot prove another driver was at fault. That applies equally to single-car mishaps where there is no one else to blame.

Waiting and Lawyer Fees

Where fault can be proved, victims must wait for a court decision or an out-of-court settlement and that can mean many months without money to pay for medical bills or rehabilitation. Lawyers commonly end up with a third or more of the eventual settlement.

The no-fault concept, pioneered in the late 1960s by two law professors, is based on a simple trade-off: More victims can be compensated and accident claims speeded up if fault is ignored and lawyers and lawsuits are squeezed out of the system.

Under this system, motorists are compensated for injuries by their own insurance companies no matter who is at fault. Suits for “pain and suffering” are prohibited unless injuries are particularly serious or medical bills exceed a certain limit.

Typically, no-fault applies only to injury claims. Claims for damage to vehicles still are settled on the basis of who is at fault.

Experts say the key factor in determining the success or failure of insurance systems is balance: If the law is too generous in allowing medical claims and too little is done to curb suits, the system is out of balance. Premiums are likely to soar and insurers, hoping to curb their losses, may issue fewer policies.

That is precisely what brought on New Jersey’s insurance nightmare, earning it the dubious distinction as the prime example of no-fault gone awry.

Adopted in 1973 amid high hopes, it was not long before the New Jersey Legislature found that it had made a major blunder. The new law provided unlimited medical benefits but did almost nothing to restrict an accident victim’s right to sue. The only limit to taking a claim to court is a requirement that the cost of treatment exceed $200.

Easy to Circumvent

For many motorists, an end-run around the system is as easy as a medical checkup and a trip to the chiropractor, said Pat Breslin, director of public affairs for the New Jersey Department of Insurance.

“Suppose you’re injured and you’re sitting in a hospital,” Breslin said. “All of your bills are being paid, but you’re thinking, ‘Do I want to file a lawsuit because of my pain and suffering?’ There is no reason for you not to sue. The lawyer gets paid zero if you lose the case and gets a third if you win. So there is no risk and no disincentive.”

Instead of reducing lawsuits, there was a litigation explosion with an additional 50% of New Jersey accident victims turning to the courts for compensation. Insurance companies tried to raise rates but were prevented by the state, which has the authority to invalidate any premium increase.

Acting in their own best interests, insurers stopped writing policies for all but the lowest risk motorists. The rest, about half the state’s drivers, ended up in a state-regulated insurance pool where a decision to hold rates down left the system in a $2-billion vat of red ink. Since March, a surcharge has been added to the bill of every New Jersey motorist to help bail out the bankrupt system, eliciting cries of disapproval from drivers already paying the nation’s highest rates.

“This is an abomination, a money-eating monster,” Joseph Tomeo, 48, a millwright from Pennsville, N.J., said of the state’s insurance pool. Tomeo, who pays $2,000 a year to cover his two cars--a 1981 Plymouth and a 1983 Mercury--is leading a recall drive against members of the Legislature.

“This is the worst insurance system in the United States,” he said.

‘Legal Dinosaur’

New York, the no-fault success story, unknowingly set out on the same troubled path when its Legislature passed a no-fault bill just a month after New Jersey’s law took effect. As he signed the measure on a winter day in 1973, Gov. Rockefeller told reporters gathered in office that no-fault would “put behind us a legal dinosaur that has cost the consumers too much money and has delivered the accident victim too little protection.”

The new law was far less generous than New Jersey’s--a maximum of $50,000 in injury compensation contrasted with New Jersey’s unlimited benefits--but its $500 threshold for filing suit was only slightly more effective in keeping cases out of court.

“It was not unusual for people (involved in the same accident) to check into a hospital over the weekend, have their legs placed into traction, come out and, lo and behold, they were eligible to sue,” said an aide to a New York legislator who helped draft the no-fault law. Three years after it was enacted, premiums jumped more than 50% and lawmakers set about rewriting the no-fault law. Benefits remained as they were but the Legislature wiped out the $500 lawsuit threshold and replaced it with a description of the kinds of serious injuries where lawsuits would be allowed.

For extra measure, the Legislature adopted fee schedules that govern virtually every health service expenditure payable in an injury claim. That was in addition to stringent regulations already in place that impose penalties on insurers that fail to pay claims within 30 days and require state approval before premiums can be raised.

The results were immediate. The volume of lawsuits fell 80%, 55 cents of each premium dollar was being returned to accident victims (up from 16 cents in the late 1960s) and rates were stabilized, although New York remains the seventh most costly state in which to buy auto insurance.

In almost all respects, Proposition 104 is more like the successful New York no-fault law than the failed New Jersey system. But there are marked differences in a number of provisions, any one of which could significantly alter the outcome.

Less Generous Than N.Y.

The California initiative, for example, offers benefits that are much less generous than New York or New Jersey and far closer to those provided by another successful no-fault state, Florida.

Under the insurance industry’s initiative, all licensed drivers would be required to obtain a basic benefits package that would compensate accident victims for up to $10,000 in medical expenses, $15,000 in lost wages and $5,000 in funeral costs. That is about the same benefit package offered in Florida. By contrast, New York provides $50,000 in combined benefits while New Jersey has no maximum limit, paying the entire cost of medical treatment and rehabilitation.

Less generous benefits mean that Florida drivers pay smaller premiums, and so might California drivers under a similar no-fault plan. But an estimated 95% of Florida motorists apparently are uneasy with their limited benefits and routinely purchase excess insurance, adding substantially to the cost.

The California proposal also goes well beyond either New York or Florida in limiting motorists’ opportunity to sue. Pain and suffering suits are prohibited under the initiative unless injuries are both “serious and permanent.” In Florida, lawsuits can be brought if injuries are “significant,” a lower standard than “serious.” In New York, motorists can go to court for simple fractures or injuries that are not permanent, but severe enough to keep an accident victim hospitalized for several months.

Right to Sue

“I don’t quarrel with the stronger (lawsuit) threshold but I think there should be a higher package of benefits (in the California proposal),” said John Reiersen, assistant chief examiner of the New York Department of Insurance, who helped draft its revised no-fault law. “What you’re giving up in terms of rights to sue should be balanced by what you’re receiving. . . . I would really have to question whether the $10,000 in medical benefits is an adequate trade-off.”

Jeffrey O’Connell, professor of law at the University of Virginia and a co-author of the no-fault concept, agreed that the California initiative’s combination of low benefits and strict limits on lawsuits appears to be “overly balanced” in favor of insurance companies. But he noted that the state has a reputation for being excessively litigious “so I see them playing it on the safe side.”

The most striking difference between Proposition 104 and the successful no-fault laws in New York, Florida and elsewhere is the ballot measure’s almost complete lack of a call for state regulation of the insurance industry.

In New York and 23 other states, insurers must obtain state approval before raising rates. Florida and 22 other states require insurers to submit their rates for review. And rollbacks can be ordered when rates are judged to be excessive or discriminatory.

Proposition 104, by contrast, preserves California’s existing system in which insurers neither have to ask permission to raise rates nor must file their rates with the state.

The measure also designates the insurance commissioner as the only enforcer of state laws that prohibit insurers from engaging in collusion. That provision appears aimed at heading off future anti-trust lawsuits, such as one filed this year against several insurers by Atty. Gen. John K. Van de Kamp and 18 other state attorney generals.

No Punitive Damages

Consumers would be prevented from collecting punitive damages against insurers that refuse to pay legitimate claims. And actions against insurance companies for unscrupulous claims practices would be required to go to arbitration rather than the courts.

Few of these provisions appear in other no-fault laws.

Walter Zelman, West Coast director of Common Cause, said about two-thirds of the initiative’s provisions have nothing directly to do with the no-fault system, but are actually “protective mechanisms for the insurance industry to keep competition out.” Zelman added:

“Proposition 104 is not just a no-fault system. It is a no-fault system plus an industry wish list of provisions that will permanently prohibit any efforts to regulate insurance rates.”

New York’s Reiersen said his state’s experience taught him that without regulation “there is a possibility that the result (of no-fault) could be windfall profits for the carriers. On the other hand, if the law bombs and companies start losing money, there has to be someone to prevent the wholesale withdrawal (of insurers) from the marketplace.”

The University of Virginia’s O’Connell, considered the father of no-fault insurance, reluctantly agreed. “If I had my druthers,” he said, “I’d draft a bill with somewhat more regulation. But this is what the insurance industry said: ‘We have all these (rival) initiatives that will roll back rates and call for tighter regulation.’ Like any business, they don’t like tighter regulations. . . . But they came up with quite a good law (in California).”

George Tye, a spokesman for the insurance industry campaign, said that most of these provisions simply reinstate existing California laws that passed the Legislature and “we feel have served the public well over the years.”

“There is simply no evidence that state control of insurance rates serves the consumer better than the healthy, viable marketplace that we have in California,” he said.

Unlike existing law, however, the initiative requires a two-thirds vote of the Legislature for even minor modifications. Obtaining the necessary two-thirds majority could be difficult, if not impossible, because trial lawyers and insurers, who are on opposite sides of the no-fault issue, are equally strong influences in the Legislature and commonly battle each other to a standstill.

Michigan Model

If the insurance industry was going to write a law that is unlikely to change, some critics wonder why it chose New York and Florida as the models rather than Michigan, which is acknowledged as having the nation’s best no-fault system.

Michigan drivers receive unlimited medical and rehabilitation benefits, premiums have risen slower than most other states and more than 73 cents of every premium dollar goes to compensate victims, with only 4 cents spent on court costs and lawyer fees. The state does not set rates but requires insurers to disclose what they are charging and prohibits them from refusing coverage to any eligible driver.

“Probably a lot more people would be happy in California if (Proposition 104) offered more generous benefits in exchange for what they are asking people to give up,” said Jean Carlson, Michigan’s deputy insurance commissioner. PROP. 104 COMPARED TO NO-FAULT SYSTEMS No-fault insurance operates differently in every state. The following summarizes the differences between Proposition 104, the insurance industry’s no-fault November ballot initiative, successful no-fault systems in New York and Michigan and an unsuccessful one in New Jersey.

PROPOSITION 104

Benefits: Provides up to $10,000 for medical claims, $15,000 for lost wages and $5,000 for funeral costs. More coverage can be purchased at an additional cost.

Lawsuit Limitations: Bars suits unless an injury results in death, “serious and permanent disfigurement” or is “both serious and permanent.”

Rate Regulation: Prohibits the state from fixing or determining rates, bars punitive damages against insurers that refuse to pay legitimate claims, prevents law enforcement officials from suing over alleged insurance industry collusion and reenacts other minimal regulatory provisions in existing law.

NEW YORK

Benefits: Provides up to $50,000 for medical claims or lost wages and $2,000 for funeral costs.

Lawsuit Limitations: Bars suits except for “serious injuries” that fall into eight categories. Suits can be lodged for injuries such as simple fractures.

Regulation: Premium increases require prior approval of the state and fee schedules govern every health service expenditure.

NEW JERSEY

Benefits: Payment for medical claims and rehabilitation is unlimited.

Lawsuit Limitations: Allows suits when medical claims exceed $200.

Regulation: Premium increases require prior approval by the state.

MICHIGAN

Benefits: Provides unlimited payments for medical and rehabilitation claims, up to $2,670 for lost wages, $1,750 for funeral expenses and a maximum of $20 per day to hire home help workers.

Lawsuit Limitations: Bars lawsuits except in cases of death and permanent and serious disfigurement or serious impairment of bodily functions.

Regulation: Premiums are set competitively but insurers are required to file rates with the state, which can be overturned. Insurers are required to issue policies for all eligible drivers.