Whose no-fault is it anyway?

Whose No-Fault is It, Anyway?

In America, there are three ways to get rich. You can work hard (but that's no fun). You can win the lottery (perfect--except for the long odds). Or you can get in a car wreck sue. Due to the publicity that surrounds astronomical awards for such dubious injuries as "whiplash," it's this last path to wealth--the fender bender--that sometimes seems to offer the truest promise. Foreigners must be mystified by those American bumper stickers that say, "GO AHEAD, HIT ME--I COULD USE THE MONEY!" This, thinks the visitor from abroad, truly is the land of opportunity, where you can acquire great wealth just by getting you Ford bashed up.

But closer inspection shows this system contains more tarnish than shine. Having your Ford bashed up is only the first step. To actually collect money to pay for treating your broken leg, you have to prove that the crash was somebody else's fault--someone who's either adequately insured or wealthy. This creates all kinds of problems. For one, it means you have to hire a lawyer, who will then pocket 30 to 40 percent of the money the court awards you. It also means you insurance company, which is constantly being sued by other drivers, has to hire lots of lawyers, too, driving up the cost of your premiums. Someone has to pay for all those lawyers, after all, and that someone is you. so up go your premiums.

This system of suits, known as the tort liability system, also means you have to wait--those lawyers with all those suits create gridlock in the civil courts: more than 80,000 auto cases clog the California superior court system alone. coast to coast, the nation's jurists are sifting through one car wreck after another, trying to decide whether Mr. Smith wasat fault for not turning on his blinker in time or whether Mr. Jones was at fault for not seeing it blink. (Never mind that in most car wrecks, actual fault is usually shared--Mr. Smith made a quick turn, but Mr. Jones, who should have been more vigilant, was daydreaming about his girlfriend.) By the time the court gets through all those Smiths and Joneses and turns its attention to you, years are likely to have passed.

Clogged courts, of course, inherently benefit the wealthy and powerful, who have the resources to wait. You, the little guy with the broken leg, have just shelled out $5,000 in medical expenses, and you can't bide your time for three years before collecting, so you settle out of court for half of what you're entitled to in order to avoid complete destribution. The tort system routinely undercompensates people seriously injured in auto accidents, and overcompensates those with minor injuries. After all, those with big medical bills often need to settle, while those with minor injuries can afford to wait--particularly given the chance at "pain and suffering" bonus that has nothing to do with emotional trauma or inconvenience, but is a standard three- or four-times multiple of out-of-pocket costs. A shot at such generosity also creates powerful incentives for outright fraud. No wonder insurers estimate that phony claims now account for 15 to 20 percent of all auto insurance payments.

Sound bad? It gets worse--the endless bickering over traffic cases that ties up the civil courts also keeps out matters that really do cry out for judicial attention. Say you're a small businessman who's been swindled by an unscrupulous contractor; or a parent whose brand-new, but poorly designed, toaster exploded and burned you child; or a black homebuyer denied credit by a racist bank. Chances are you'll have to wait years for justice because the courts are busy listening to Smith's and Jone's lawyers bending the truth about who caused that wreck. Of course this suits the shady contractor and the racist bank just fine; they can afford to wait. It's only you who can't.

"I don't think you could really design a much worse system if you tried," says insurance expert Andrew Tobias. Thanks to the inefficiencies of the liability system, only 44 cents of every premium dollar makes it into the pockets of accident victims. Compare that to 92 cents for Blue Cross health insurance.

Meanwhile, suits are on the rise. In Los Angeles County, tort filings have increased by more than 60 percent in the past two years. In the same county, jury awards for such notoriously unprovable injuries as whiplash and knee pain climbed 42 percent in a single year. As a result of this liability system, auto insurance is an increasingly unaffordable item: A Philadelphia couple with an 1988 Chevy and an 1984 Olds and two clean driving records now pays $2,400 annually for standard coverage. In a number of states, including Pennsylvania and California, the demand for auto insurance reform has emerged as a pivotal political issue; in New Jersey, the issue may decide who becomes the next governor.

Cheap, quick, and fair

What is so maddening about the crisis in auto insurance is that the solution is hardly a secret: no-fault insurance. That concept has existed almost as long as cars themselves (it was first conceived by Judge Robert S. Marx in 1925), and it's been a serious proposition since the publication of Robert Keeton and Jeffrey O' Connell's Basic Protection for the Traffic Victim in 1965. No-fault is cheaper, quicker, and fairer.

No-fault treats auto insurance like any other kind of insurance: If you get injured, you get paid. Period. It's cheaper because it eliminates the lawyers and the incentive for "pain and suffering" fraud. It's quicker because it eliminates the court delays. It's fairer because you get paid for what you injuries actually cost you--your out-of-pocket medical expenses, rehabilitation costs, and lost wages. True, you can't look forward to that pain and suffering jackpot--the kind that inspires bumper stickers--but then again Blue Cross doesn't compensate you for pain-and-suffering either. There's also a common-sense appeal to no fault: Since most accidents are just that--accidents--in which both drivers share some blame, what's the point in having a battery of lawyers concocting clever arguments about whose guilt is greatest?

The virtues of no-fault insurance have been borne out by experience. After Michigan switched to no-fault in 1973, AAA Insurance cut the amount it paid lawyers from 32 percent of its premium revenues down to only 4 percent; at the same time, it increased the amount paid to claimants from 48 percent to 73 percent. After New York instituted no-fault, its auto-injury court filings dropped 80 percent. In Michigan, the average insurance premium is 17 percent less than it would be without no-fault, according to a 1985 study by the Transportation Department. In New York it is 6 percent less; in 21 percent less. Furthermore, a recent study done by former White House Conusumer Affairs Adviser Virginia Knauer estimates that no-fault would save consumers $3.7 billion a year. As the California Insurance Commissioner put it, consumers are "not going to get lower auto insurance rates" without reforms like no-fault.

With the case for no-fault insurance being plain for anyone to see, an obvious question arises: Why has no-fault insurance--real no-fault insurance, that is--been instituted in only three states? And why does no-fault now seem such a discredited concept?

There are two guilty parties. The first is the trial lawyers. They're the ones who get rich dragging car wrecks through the courts, and, as it happens, they also have inordinate influence in the state legislatures, where insurance laws get written. (A 1945 act of Congress forbids the federal government from regulating the insurance industry.) The trial lawyers have consistently used that influence to block true auto insurance reform.

While this may come as no surprise--few of us have any illusions about the effects of lawyer-lobbyists on the public good--the second part of the answer is a surprise indeed: Ralph Nader. That's right, Mr. Consumer Advocate himself has consistently teamed up with the trial lawyers to block one of the most important consumer reforms in the country. While the trial lawyers are driven by plain old greed, Nader at least is driven by principle--his inordinate belief in the virtues of the lawsuit. But the effect of both on the average consumer is the same: He gets screwed.

Thanks to trial lawyers and Nader, there is a great deal of confusion surrounding no-fault insurance. While, in fact, it is an ideal reform that's seldom been tried, most people think it's been tried quite often and found to be a failure. That's because 21 states have concocted watered down no-fault systems--fake no-fault--that in some cases is worse than the tort system it replaces.

Witness this process at work: First the trial lawyers emasculate the no-fault proposals, ensuring their failure. Then, conveniently, they turn around, and point to those failures as evidence that no-fault doesn't work. They call it "stingy" for refusing to cover pain and suffering; they say only a tort-based system can punish bad driving. What they don't say is that they've got billions of dollars in contingency fees at stake. This is quite a sophisticated, and effective, con job; and with insurance reform bills pending in a number of state legislatures, the public's only hope is that enough voters see through it.

The watered-down no-fault laws the trial lawyers gave us break down into two categories. First, in nine so-called "add-on" states, insurers must offer (and, in five, consumers must purchase) a certain amount of no-fault coverage in addition to standard liability policies. In these states, individuals still have an unrestricted right to sue and be sued to recover for accident-related injuries; the only difference is that they can also recover additional amounts directly from their own insurer for out-of-pocket costs. Add-on legislation may result in more accident victims getting compensated--since payment on the additional coverage is not fault-based--but it will also mean higher premiums and no reduction in court caseloads.

In fact, add-on laws may result in more auto-injury-related court filings. Under the traditional tort system, victims are often left with no funds to cover accruing medical and other expenses while they await their turn on the docket. That's why claimants often settle instead of waiting for a court date several years away (and risking the uncertainty of a jury verdict). In add-on states, by contrast, no-fault coverage guarantees victims if not a war-chest, at least a cushion with which to press on with a lawsuit. This leads to more claims, greater dollar payouts per claim, and, therefore, higher premiums.

The second type of merely nominal no-fault system now in place--so-called "no-lawsuit" no-fault--has in some cases worked out even more poorly: Victims must meet a dollar threshold of out-of-pocket expenses before they can take their claims to court. But these thresholds are often so low that they keep virtually no cases out of court. For example, in Connecticut injured parties need only demonstrate $400 in medical expenses (that's couple of trips to the doctor, with a few tests thrown in) to jump the no-lawsuit hurdle. And in other states with higher thresholds, victims have a powerful incentive to run up medical bills in order to make the cut. By contrast, true no-fault states, like Michigan, allow suits only when someone's been killed, dismembered, or severely disfigured.

Money talks, no-fault walks

To understand why 26 states haven't had any no-fault legislation at all, and why 21 others have settled for No Fault Lite, which is often just as bad, it's important to remember a crucial fact about the politics of state legislatures: They're heavily influenced by trial lawyers. This happens in two ways. Countless key legislators are lawyers themselves--and therefore have an interest in preserving the tort system that earns them contingency fees. And countless others are the beneficiaries of trial lawful largess.

Consider the case of Pennsylvania, where the trial lawyers first helped ensure that the state's no-fault law was watered down, then got it ditched in 1984, and have subsequently blocked attempts to reinstate it. In getting rid of no-fault in 1984, the trial lawyers teamed up with the insurance lobby, who agreed to support the lawyers' opposition to the no-fault law in exchange for getting the lawyers' backing on an entirely unrelated plan to create to state-run catastrophic insurance fund. "There is no question that '84 was a product of a joint effort by trial lawyers and the insurance industry," says Otis Littleton, a Pennsylvania House aide. "As a result, we have a law that benefitted everyone but the consumer."

When Governor Robert Casey tried to revive no-fault this past summer, the lawyers' lobby was again the chief impediment. The plan won bipartisan support in the state House but screeched to a halt upon arrival in the Senate--just as the lawyers, who have close Senate ties, expected. The bill's chief Senate opponent, Ed Holl, who chairs the Senate Banking and Insurance Committee, had several reasons to set his considerable influence to work against it. Holl has been a favorite beneficiary of the Pennsylvania Trial Lawyers Association; the lawyers have contributed $10,000 to Holl in the last year and a half alone, making him their second largest beneficiary in the legislature. In hindsight, it seems a prudent investment. Holl introduced his own insurance reform bill--one that retained the tort system that has been so generous to the state's lawyers--and the bill cleared the Senate. So now the state has a no-fault bill passed by the House, a tort bill passed by the Senate, and little chance of reconciling the two-meaning no-fault, for now, is dead. "The legislature is hopeless," says Herb Dennenberg, a former Pennsylvania insurance commissioner and an ardent backer of no-fault. "They roll over and play dead and let the trial lawyers take over."

Turn now to California, and you'll find it's deja vu all over again--someone suggested a no-fault system, and the trial lawyers blocked it. In this case, the someone was a legislator named Patrick Johnston, who chairs the Assembly's Finance and Insurance Committee. Johnston's no-fault bill had cleared the insurance committee and was heading for Ways and Means, where its prospects looked good, when Speaker Willie Brown, trial lawyer and trial lawyers' friend, began to intervene.

Maybe Brown just thinks a tort system is better. Maybe the fact that he himself works as a personal injury lawyer has no effect on his position. Or the fact that trial lawyer groups paid him $7,000 in honoraria last year. Or the fact that the California Trial Lawyers Association donated $85,000 to his last campaign--just for the primaries, that is. Or that the group's total primary contributions reached $873,000, making it the state's second-largest PAC. (They stopped giving money to Johnston, by the way, when he proposed his bill: no-fault, no money.) Or the fact that the vast majority of those funds went to the Democratic party that Brown leads. Maybe. Then again, whatever one may think of Willie Brown's leadership of the California Assembly, it's fair to suggest he hasn't achieved his position of influence by alienating his party's top financial backers.

The day before the Ways and Means Committee was scheduled to vote on the no-fault bill, Brown held a closed-door meeting for the committee's Democratic members, touting his own insurance reform bill--one that lacked the key no-fault provision. The next day the committee reported out Brown's bill and grafted on Johnston's proposal as an amendment, creating a completely incoherent proposal that called for no-fault insurance and opposed it at the same time. Not to worry. The plan was headed to the Senate Judiciary Committee, which must approve any insurance bill, and whose 11 members (eight are lawyers) had received $297,000 in campaign donations from the California Trial Lawyers Association during a recent 18-month period. The committee was glad to resolve the dispute, striking down the no-fault provision by a 9-2 vote.

Ralph's religion

The defeat of no-fault isn't the result of entrenched, moneyed interest alone; even entrenched, moneyed interests sometimes lose. Occasionally, heroes like Ralph Nader can bring enough publicity and morality to bear to make the good guys win. And Nader is so singularly influential that his determined backing would have the potential to make no-fault a nationwide reality. So it's all the more dismaying to find Nader using the force of his considerable reputation to block these efforts at reform. Anti-no-fault material recently mailed out by the American Trial Lawyers Association boasted, "From: Nader's Center for Study of Responsive Law--Not a Trial Lawyer Document." Nader's argument is that any restriction on the public's access to the courts is bad. That view has no doubt been shaped by Nader's fondness for product liabiality suits. Without them, consumers might still be stuck with all those injuries and medical bills from Corvairs and Pintos.

But unlike cases of corporate America turning out unsafe products, in most auto accidents there are no scheming Goliaths against whom only the resources of the courts will prevail--there are usually just individual drivers who have made unintentional mistakes. (Even the purer forms of no-fault allow lawsuits against the only real bad guys in this arena: drunks.) Nader has stubbornly refused to recognize this distinction. "Listen," he recently told a San Diego audience, during the California no-fault debate, "insurance spokesmen--and I've dealt with them for years all over the country--they don't want the tort system, period. They want to get rid of the civil jury." Harry Snyder, executive director of the Consumer's Union in California, says. "Ralph has a view bordering on the religious. It is a basic tenet of his being that no-fault shouldn't happen."

Without Nader's backing, the consumer lobby hasn't been able to bring much pressure to bear on the issue. The Consumer Federation of America endorsed the Johnston no-fault bill but made a self-conscious decision not to actively work for it. Some actually feel intimidated by Nader's disapproval. "It puts consumer groups in a difficult position to be on the other side of an issue from him," says Glen Nishimura, executive director of HALT, a Washington-based legal reform group. "The specter of, the promise of, the likelihood of Nader's opposition saps their enthusiasm on no-fault." And while many other consumer lobbies, such as the Consumer Union and the National Insurance Consumers Organization (a Nader spin-off group), do still support no-fault, without Nader they have much less clout.

Meanwhile, the nation's insurance companies have proved similarly ineffective as lobbyists. On the whole, the insurance industry tends to back no-fault, since it eliminates the outrageous jury awards, and, in reducing delays, tends to smooth relations with injured customers. But the insurance business is also a fragmented one; while the home office might back no-fault, independent brokers specializing in high-risk drivers might oppose it, since any measure that reduces premiums reduces their commissions. The lawyers have more at stake. Insurance companies, for the most part, will make their money either with no-fault or without it; it's the trial lawyer whose living is on the line. And at times, the insurance lobby has just had more pressing concerns, as in Pennsylvania in 1984, when the insurers traded away their no-fault bill in order to gain political backing on the catastrophic health care fund. Now, with insurance premiums at record highs, any proposal coming from the insurance companies is likely to meet with a large dose of public skepticism.

Still, with a good plan and wise promotion, the insurance companies and allies could win the no-fault battle. Unfortunately, the backers of no-fault haven't been putting forth either. Before the insurance debate wound up in the California legislature, for instance, it would up on the ballot. Among the reforms voted on was Proposition 104, a no-fault plan backed by the insurers. But the insurers did little to court consumer support and tacked on a number of unrelated features; the final initiative sprawled to 24,000 words! The state's trial lawyers had an easy time painting it as an insurance industry con-job, and the proposal went down to defeat by more than a 2-1 margin.

By now, the trial lawyers and Nader have been so successful in misleading the public about no-fault insurance that no state has enacted a no-fault measure since 1983, even the watered-down kind. But that doesn't mean pure no-fault should be abandoned. On the contrary, without no-fault the auto insurance mess is unlikely to ever be straightened out. Experience has shown that without pure no-fault, you're stuck with phony reforms, fleeced customers, and courtrooms full of smiling lawyers. That's why in a sense, no-fault is almost inevitable. But it's a shame that it's taking so long.

Peter Spiro is a law clerk for a federal appellate judge. Daniel Mirvish is a Washington writer. David Urbanczyk provided research for this article.