No-Fault Insurance Cuts Cost, Benefits, Study Says

A well-designed no-fault plan would cut auto insurance costs in California substantially, a report prepared by RAND’s Institute for Civil Justice said Thursday.

But in releasing their study of how different no-fault systems would work in California, the researchers declared that in order for any no-fault plan to save money, it must cut the total compensation paid to auto accident victims.

“There is no free lunch,” said one of the report’s authors, Stephen J. Carroll. “In order to save money, you’ve got to be paying out less money in compensation, specifically less money for general (pain and suffering) damages.”

No-fault refers to an auto insurance system under which one’s own insurance company reimburses for the costs of treating injuries and some other losses, regardless who is at blame in an accident. Under a tort liability system, such as is in force in California, the insurer of the party judged to be at fault for the accident pays.

The 240-page RAND report comes at a time when a reapportionment plan prepared under the auspices of the state Supreme Court may lead to shifts in the Legislature that could push no-fault toward approval in California after years of successful opposition by Assembly Speaker Willie Brown (D-San Francisco).

RAND officials expressed hope that their report will clarify the choices facing lawmakers and assist in the adoption of a no-fault plan that will maximize savings.

But, as expected, release of the report led quickly to a dispute with trial lawyer representatives. The California Trial Lawyers Assn. strongly opposes no-fault, in part because it is aimed at reducing income of the lawyers from the auto insurance system.

Will Glennon, legal analyst for the lawyers group, challenged the cost projections as spurious and declared it “a very black day” for RAND, which he said has lost its last veneer of neutrality on the matter and fallen into the laps of insurers who favor no-fault. Glennon insisted that no-fault would cost policyholders more, not less.

Kevin McCarthy, director of the Institute for Civil Justice, insisted the figures were based “on real data,” although he conceded they do incorporate certain assumptions that future policyholder buying practices will remain constant.

Carroll said it is clear from the study that some kinds of no-fault save far more money for policyholders than others, and that some might even increase costs.

Generally speaking, the RAND study found that a plan similar to no-fault systems in force in Michigan or New York would save the most money in California.

These are plans that allow injured policyholders to file lawsuits for damages only after a “verbal threshold” is crossed. For instance, New York requires that “serious or permanent injury” occur before a lawsuit may be filed. Injuries deemed less than “serious or permanent” are subject to compensation only through the no-fault system.

By contrast, in a state such as New Jersey--where there is a “monetary threshold”--the no-fault system has proved less effective. When the cutoff for lawsuits is based on the dollar amount of damages--$5,000 for instance--many people manage to inflate their claims enough to surpass the threshold.

That results in fewer accidents being handled within the no-fault system.

The RAND report estimated the savings or additional costs for various combinations of insurance policies and no-fault systems.

On a national basis, the researchers said, a no-fault system with a monetary threshold of $1,000 and a maximum benefit of $15,000 would save 12% on bodily injury premiums. But the same benefits under a system setting a “verbal threshold” on lawsuits would save 22%, and an absolute ban on any lawsuits, no matter how much the damage or how serious the injury, would save 52%, the study found.

Since the cost of covering injuries accounts for half, or less, of most auto insurance premiums, the actual savings from no-fault realized by most policyholders would be considerably less.