Driving Auto Rates Up, Insurers Say : Inflated Claims Seen as Fast Lane to Easy Money

First there’s the screeching of tires.

Then comes the crash of metal on metal.

And finally there is the tinkle of falling glass as headlights and taillights crumble to the pavement.

These are the all-too-familiar sounds of motorists meeting by accident.

But to many Californians, these are also the sounds of opportunity knocking, according to auto insurers who say Californians are routinely abusing the insurance system by running up thousands of dollars in unnecessary medical bills and pain-and-suffering claims.

Simple but powerful incentives under California law--such as the ability to collect multiple medical benefits from several insurance companies for the same injury--are creating an atmosphere in which, the insurers say, an accident is not a tragedy but an opportunity to reap a financial windfall.

“It’s like hitting the lottery,” said Melville P. Windle, general counsel of 20th Century Insurance Co.

Industry officials say it is these claims that are the engine driving runaway auto insurance rates in California.

Trial lawyers and consumer advocates, most notably Ralph Nader, say that fraud is only part of the reason for high insurance rates.

Even the insurers concede that eliminating fraud altogether would not make insurance cheap. One industry estimate is that cleaning up the fraud problem would mean a 7% to 17% cut in auto insurance rates, while other estimates run as high as 30%.

Still, an examination of injury claims submitted to several California auto insurers reveals a pattern of large medical bills arising from even minor accidents--some so insignificant that there was no damage to any vehicle.

Files reviewed by The Times showed that medical reports often differed only in the name of the patient--with the diagnosis, cause, treatment and final billing amount almost identical to those of other patients visiting the same doctor.

And, curiously, the files showed that accident victims often did not visit their neighborhood family physicians, but rather chose to see doctors and chiropractors miles away, at the suggestion of their attorneys.

During the last 10 years, the rate at which Californians make claims against auto insurers for physical injuries has nearly doubled at some of the state’s large insurers. The highest rates are recorded in metropolitan Los Angeles, where, on average, there is one bodily injury claim filed for almost every accident reported--more than double the pace found in rural areas or smaller cities such as San Diego--according to a study by 20th Century Insurance.

“You have to conclude that people are double as fragile, or something else is at work . . . that something else is clearly wrong,” said Rick Dinon, vice president of 20th Century.

The Automobile Club of Southern California reports that the frequency of physical-injury claims has jumped 32.4% over the last seven years, even though the frequency of accidents resulting in damage to autos fell by 6.5%.

Few Have Visible Wounds

What makes insurance officials skeptical of many of these bodily injury claims is that only a small percentage of all auto accident victims claiming personal injury have any wounds or other visible or verifiable injury. At the Automobile Club, for instance, only 10% of bodily injury claims have an “objective,” or physically verifiable, injury.

The remainder are for what medical officials refer to as soft-tissue, subjective injuries.

In simpler terms, that means whiplash maladies--sore backs, sore necks and headaches.

Some medical authorities, such as Dr. Richard Corlin, speaker of the house of delegates of the California Medical Assn., said in an interview that “an overwhelming majority of these cases could have been treated adequately with home treatment of aspirin and heat and one or two visits to a family practitioner.”

Dr. Peter Martin, president of the California Chiropractic Assn. and a practicing chiropractor in Lancaster, said “10 years ago they would just take aspirin and walk it off.”

But now victims of minor accidents are routinely seeking legal assistance and extended medical treatment.

Greater Awareness

Many attorneys and doctors defend the trend of increased medical claims by saying that it is rooted in a greater consumer awareness of legal rights and a heightened concern for personal health.

But some also acknowledge that there is a pervasive and cynical desire among Californians to seize any opportunity to get even with the insurance industry.

“There’s not an attorney in California that hasn’t had someone walk into his office and say, ‘I just got hit and I want to make some money,’ ” said Will Glennon, legal analyst for the California Trial Lawyers Assn.

Glennon maintains that most attorneys would promptly show such a client to the door. “The job of an attorney is not to create injuries,” he said.

But hundreds of lawyers in California openly solicit personal-injury cases. Daytime television is filled with their ads, as are the Yellow Pages.

And many California doctors regularly solicit attorneys to send them patients, according to Donald Kottler, a Los Angeles attorney who specializes in personal-injury cases and advertises his services in the Yellow Pages.

Defends Referrals

Kottler defended the practice of steering clients to specific doctors who specialize in personal-injury lawsuit work.

He said that many accident victims have no medical insurance and do not have the money to pay doctors, so he sends clients to physicians who are willing to wait to be paid until the claims are settled.

Kottler said that many neighborhood family physicians “don’t want to get involved” with lawsuits or are unwilling or unable to prepare the detailed medical reports necessary to build a successful claim file.

To be sure, not all or even a majority of these whiplash claims are pumped up or fraudulently invented.

And there are a host of other reasons besides increasing medical claims for escalating insurance rates, including the inefficiency of some insurance companies, higher medical costs, worsening traffic and increased numbers of accidents.

Critics suggest that insurance rates have grown at an even faster pace than the actual costs of the increased bodily injury claims.

Dispute Claim of Insurers

The legal and medical lobbyists say that the extent of fraud through pumped-up claims is nowhere near the magnitude claimed by the insurers. Still, early indications from a continuing RAND Corp. study of auto insurance claims indicates that there has been a sudden and sustained jump in lawsuits filed since 1985, following a 10-year period of flat growth.

The growth is due to a number of factors such as changing legal precedents, the advent of attorney advertising, changing health concerns and social norms.

People who have successfully milked the system often prod others to seek the same windfall. “People are talked into it by attorneys and their neighbors,” said Michael Josephson of the Josephson Institute for the Advancement of Ethics.

“It spreads by word of mouth,” said J. David Cummins, a professor of insurance at the Wharton School of Business at the University of Pennsylvania.

In response to these changes, a complicated system has been created in which all the players now have a great financial interest. And the system is seemingly impossible to dismantle.

Making Claim Credible

Lawyers send clients to doctors to form the basis of a credible claim, Kottler said.

Doctors then often over-treat and test to an extreme out of fear of missing a real injury and then being sued for malpractice, according to Martin and Corlin.

Insurance companies in turn pay off on many frivolous and questionable claims out of fear of being sued later for bad-faith dealings and because it is often cheaper to settle the claims than to fight them in court, claims executive acknowledged.

Even when cases are headed for trial, judges routinely pressure insurance companies to settle claims of less than $25,000 out of court, in an effort to clear packed court calendars.

“Who’s unhappy” about the trend? asked Dick Sacino, senior vice president of claims at CalFarm Insurance Co. “Not the doctors. Not the lawyers. And insurance companies can pass (the costs) along. If the public wants to tolerate this abuse, we’ll deliver it.”

The myriad cases of what insurance company executives call “legalized fraud” or “claim inflation” are not the multimillion-dollar damage awards to quadriplegics and other severely injured victims. Those cases are rare and represent a small portion of an insurance company’s costs, officials say.

Considered ‘Peanuts’

And the out-and-out fraud of staged accidents, while troublesome, is considered “peanuts” in comparison to the daily barrage of real, but deliberately inflated, cases, according to Sacino and other claims officials.

Insurers say the most troublesome cases are the seemingly innocuous ones where medical treatment runs from $1,000 to $4,000 and requests for compensation run from $5,000 to $20,000. It is these relatively small cases that add up to billions of dollars annually.

Several major insurers in the state allowed a Times reporter to review these whiplash and other soft-tissue injury claims files at random, under the condition that names of the claimants, doctors or lawyers not be used.

One extreme case that illustrates the problem of growing medical claims was recently filed with the Automobile Club.

In this case from Hollywood, a Mercedes-Benz carrying three occupants rear-ended a Cadillac carrying six people. The Mercedes driver, insured by the Automobile Club, admitted that he was at fault.

There was no damage to either car, but all six occupants of the Cadillac sought and received medical care. Three ran up bills in excess of $3,500 each, and the others spent in excess of $2,500 each for treatment of sore backs and necks.

Two passengers in the Mercedes also sought and received medical care in excess of $3,000 each for their sore backs and necks.

Only the driver of the Mercedes did not seek medical care. He is also the only one of the nine people involved in the accident who is not in a legal position to sue for general damages, or the so-called pain-and-suffering awards.

Pain and suffering is usually calculated at three to five times the value of medical care and lost wages. That legal precedent is seen as an incentive to all involved to run up, or build up, the medical bills as much as possible, insurers say.

In the case of the Mercedes and the Cadillac, total claims for medical costs and pain and suffering are expected to top $50,000.

“We don’t believe that any trier of fact will believe (that this is a valid claim),” said Bruce W. Randall, director of claims for the Automobile Club. “But then, we have no evidence (that it is fraudulent). And if we are wrong, and they get an award (from an arbitrator or a jury) they can turn around and sue us for wrongful denial of the claim.”

Get Multiple Payments

In many cases, the medical costs have already been paid by the victim’s own medical insurance, according to insurers. The injured can also file under the medical coverage of his own auto insurance for compensation. A third medical payment from the at-fault driver’s insurance company is also gravy.

So, even without a pain and suffering award, a victim with a $3,500 bill from a chiropractor could easily put $7,000 in his pocket even after paying off the doctor. And all insurance settlements are tax free.

In another case that CalFarm Insurance claims manager Bud Myers called “very typical,” one car rear-ended another in Los Angeles. One car sustained no damage, the other had damage of just $107. The driver of the not-at-fault car saw a doctor for whiplash and received $567.92 in care. She is suing for $5,000. CalFarm offered $2,000 to settle the case and indicated that it would not pay more than $2,750. The plaintiff’s attorney would not budge and the matter is now headed for court.

“In a vast majority of cases, there has been an accident, there has been an injury. But it is a matter of degree,” Myers said. “The same accident 10 years ago would not result in medical claims. The same accident in Fresno would not result in a claim.”

In another low-speed rear-ender case submitted to CalFarm, three young laborers have filed suit. “Three people were in the car; three were injured. All with the same attorney, all the same injuries, all soft tissue (whiplash), all (had) 90-day treatments,” said Sacino, reading in a monotone suggesting that he has seen the same facts, from the same word processor, again and again.

$8,916 Medical Bill

The total medical bill came to $8,916--half of which was for medical tests rather than therapy or treatment. Their attorney has asked for $15,000 for each of the plaintiffs.

CalFarm plans to offer $7,500 each, and hopes to actually settle for $10,000 apiece, or $30,000, in this routine case.

“They may have been hurt, but were they hurt $10,000 worth?” asked Sacino, adding that he thinks this is a classic case of what has become know in the industry as “building up” a claim.

“It’s not fraud in the true sense of the word; it is not a staged accident. The build-up is a difficult kind of fraud (to prove). It’s in degrees,” he said.

Insurance claims executives displayed a cynicism of their own.

Some victims who saw doctors immediately following an accident were faulted for not waiting to see if the injury would go away naturally.

Basis for Lawsuit

Others who did wait, and visited a doctor weeks after an accident, were suspected of seeing the physician only as a basis for filing a lawsuit.

It difficult to tell who is actually suffering from whiplash and who is not.

But until recently, insurers have had a great incentive to settle even questionable cases. A landmark 1978 California Supreme Court ruling known as the Royal Globe decision, gave accident victims the right to sue insurance companies for bad-faith dealings. If an insurer made a low offer to settle a claim and the injured party later received a much higher award from a jury, he could then sue the insurer for tens or hundreds of thousands of dollars.

Four months ago, the high court reversed itself.

It is still unclear what immediate effect the reversal is having on frivolous cases.

Some insurance executives say claims adjusters are inclined to follow the old rule and pay off on many marginal claims. Trial attorneys, however, say the insurers started delaying claims settlements right after the Royal Globe decision was reversed.

And just how much money would be saved by eliminating marginal cases is also unclear.

Could Reduce Costs

Stanley Zax, president of Zenith Insurance and former head of the Assn. of California Insurance Companies, said that cutting fraudulent claims out of the system could cut auto insurance rates by 7% to 17%.

Cummins, the professor at the Wharton School of Business, said that estimate is conservative.

Cummins, who said California insurance claim rates are “outrageous,” suggested that cutting out fraud and frivolous claims could lower rates by 30%. And “squeezing the fat” out of the insurance companies could save an additional 10%, he said.

Insurance industry critics question whether fraudulent claims are as much of a problem as the insurers say.

Harvey Rosenfield, consumer advocate and Proposition 103 author, Glennon and others said they believe the problem is a minor one. The insurance industry is using the issue as leverage to usher in a no-fault system of auto insurance, they said.

Doctors, lawyers and consumer advocates say that wholesale changes in the system are not warranted.

They say that if fraudulent claims are the problem, then the solution is to prosecute offenders.

Said Glennon: “To the extent fraud is out there, let’s do something about it; let’s clean it up.”

RISING BODILY INJURY CLAIMS Reported Claims Relative to 1980 Source: Auto Club of Southern California According to figures supplied by the Automobile Club of Southern California, the frequency at which motorists filed bodily injury claims rose by 32.4% during the first seven years of the decade, while the frequency of accidents that actually resulted in damage to vehicles dropped by 6.5%. Verifiable injuries, such as broken bones, cuts and bruises, represent just 10% of the claims filed. The vast majority of claims are for so-called whiplash injuries--primarily sore backs, stiff necks and headaches.

Bodily Injury: 132.4 % (as of June 1987) Property Damage: 93.5% (as of June 1987) Whiplash: 90% Verifiable Injuries: 10%