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Whatever happened to no-fault?


Newspapers lately have been full of stories about the "liability crisis.' Insurance company profits are falling, premiums are rising, and the industry and consumers alike are starting to panic. In New York City, the tram line from Manhattan to Roosevelt Island shut down because the company that insured it would not renew the policy. In Janesville, Minnesota, last year's Nativity pageant was canceled because insurance costs were prohibitive. In St. Anthony, Idaho, unaffordable insurance premiums closed down the city office building, the public library, the senior citizen center, and the snowplow service.

The liability crisis has inspired much debate about whether the enormous volume of litigation that accounts for much of the high cost of insurance ought to be restricted. Unfortunately, the question of whether to limit the right to sue can be frustratingly muddy. Do we really want to ease the pain felt by manufacturers of drugs that cause birth defects? Should architects and engineers who design buildings that collapse avoid responsibility?

But if the liability crisis as a whole seems to defy simple solutions, there is one substantial chunk of it that does not: automobile accident cases. In state courts around the country, automobile-related lawsuits often account for more than half the case load, driving up auto insurance premiums, delaying benefits for accident victims, and devouring dollars that might be spent compensating serious injury. Rather than spend time and money arguing in court about who is at fault when two cars happen to collide, as cars inevitably do, why shouldn't insurance companies automatically pay out benefits to any policyholder who suffers in a traffic accident, no matter what the circumstances?

This idea, of course, got a lot of attention during the 1970s under the name of no-fault auto insurance. Massachusetts passed the first no-fault law in 1970. Twenty-three other states followed suit. There even was an effort in Congress to establish no-fault nationwide. But you don't hear much about no-fault these days. When you do, the news is usually that some state government has lost faith in it. No new states have been added to the no-fault roster since 1975, and Nevada, Pennsylvania, and the District of Columbia, have repealed it. Conventional wisdom seems to be turning against no-fault as yet another starry-eyed liberal reform that failed.

But if no-fault is to be judged a failure--and we think it shouldn't be--the problem lies not in the idea but in its half-hearted execution. Even where no-fault has been tried, the fault-based tort system that no-fault was meant to replace usually has remained relatively unthreatened. No-fault statutes have not gotten enough victims of automobile accidents out of our courts because the lawyers won't allow it.

No fault, no fee

The case for no-fault was and remains simple and compelling: the traditional, tort law process of fault-finding gobbles up time and money that could be spent compensating people who need help. Under a pure tort system, if a driver suffers injuries from a car accident, he is not automatically entitled to compensation from his insurance company. Before he can collect, he must demonstrate to a jury that another driver was responsible for the accident. If the victim wins, the wrongdoer (actually, the wrongdoer's insurance company) must pay him not only for his out-of-pocket expenses--medical costs and the loss of wages--but also for the "pain and suffering' that results from the injury. If he loses, he gets nothing.

In contrast, under no-fault, an accident victim does not need to prove that anyone was at fault before he gets his money. A no-fault policy insures against any circumstance that might injure a driver. The harm might come from another driver; it might also come from the victim's own carelessness, a situation the tort system cannot address. Consider a collision with a stationary object. If you crash into a tree, you'll have a hard time convincing a jury that it ran out into the middle of a road. (Anyway, trees tend to be insolvent.) Or consider a collision with another driver that injures the driver who caused the accident. Under the tort system, if you're at fault you can't collect.

And what about the broad gray area in which most traffic accidents occur--cases where both drivers are at fault? Maybe one fellow was speeding because he was a little anxious about being late for an important business meeting. Maybe the other was looking out the window at an attractive woman who was crossing the street. The tort system's usual solution is to have the two men slug it out in court over who was more guilty. Both men will be tempted to distort the truth in order to collect; moreover, if the jury concludes that both were negligent, both men may be losers --neither may be compensated for injuries. Under no-fault, the question is irrelevant.

The difference no-fault can make in the lives of auto accident victims was illustrated dramatically by two cases cited in a 1984 issue of Consumer Reports. In Illinois, which operates under the tort system, 25-year-old Robert Demichelis was returning home from a basketball game at Northern Illinois University when he dozed off at the wheel. His Datsun 200SX bounced off a guard rail and smashed into a concrete divider in the middle of the interstate. Demichelis's head struck the windshield, and he suffered brain damage. His ability to reason and make judgments was sufficiently impaired that he was unable to hold a job. Health insurance covered his medical bills, but his family ended up paying for his rehabilitation treatments. At the time the article appeared, Demichelis's family had paid out $15,000. Because they had no one to sue, there was no auto insurance money to cover the cost.

The second case took place in Michigan, which has the best no-fault law in the country. Thirteen-year-old Faith Ann Glynn was riding her bicycle when a car struck her from behind. Glynn, like Demichelis, suffered brain damage. In addition to having two brain operations, she lived in nursing and rehabilitation centers for two years. But in Glynn's case, the automobile insurance company that covered the entire family picked up all her medical expenses. It didn't matter that Glynn hadn't been driving a car; their coverage extended to auto accidents that occurred when a member of the family was walking or riding a bicycle.

Of course, if Faith Glynn had been injured in a state operating under the tort system, she would have been able to sue the driver. But, practically speaking, tort awards are limited by the extent of the wrongdoer's liability coverage, which most states set at a minimum of no more than $10,000 or $20,000. (Glynn's medical bills and rehabilitation treatment, all paid by her auto insurance, came to more than $180,000.) While it's true that most people take out insurance in excess of the minimum, there's no guarantee that the fellow who crashes into you will have--and, under a tort system, it's the other guy's coverage that determines how much you collect. No-fault, by contrast, removes this anxiety, since what matters is not someone else's coverage but your own. And that coverage can be more generous because of money saved by avoiding the courtroom. (Largely thanks to lawyers' fees, only 44 cents of every dollar paid into liability insurance pools makes it into the pockets of accident victims.) This is not to say that no-fault is prone to granting extravagant awards. For one thing, no-fault does not reward on the basis of "pain and suffering.' No-fault also caps recovery for lost wages and often subtracts compensation made to the victim under other insurance programs. Most important, payments are disbursed as medical and other bills fall due and not in the sort of speculative lump sums that make trial awards resemble a grotesque sweepstakes.

Crossing the threshold

If no-fault's virtues are so obvious, why are states now turning against it? We can begin to answer this question by looking at the half-hearted way most no-fault legislation has been drafted. Most states have chosen to water down the no-fault principle in one of two ways.

The first is to set thresholds that must be reached--most commonly, medical expenses in excess of a certain dollar amount--before an injury victim may bring legal action. The states that have adopted this form of no-fault--16 of the 24--are called "no-lawsuit' states. This is a serious misnomer. Lawsuits are routine in many of these states. The dollar threshold for medical expenses is as high as $4,500 (Minnesota) and as low as $200 (New Jersey). Obviously it doesn't take much of an injury to come away from the doctor with a $200 bill. And even when the dollar threshold is high, doctors with an eye on the "pain and suffering' jackpot, which typically pays off at three to five times the amount of real economic loss, may be tempted to pad costs. (One doctor charged with cost-padding was the proud owner of a yacht called Whiplash.)

A better way to set thresholds is through categories of harm--for example, those who have suffered permanent disability, serious disfigurement, or the loss of a limb. These "verbal' thresholds tend to be more restrictive than monetary thresholds, with the result that the verbal threshold no-lawsuit states--Michigan, New York, and Florida--end up having, well, fewer lawsuits.

The second method of watering down no-fault is to place no restrictions at all on the right to sue and merely to require insurers to sell, and in some cases drivers to buy, no-fault insurance. Eight of the 24 no-fault states have adopted this form of no-fault, including Texas, Maryland, and Oregon. In these "add-on' states, no-fault is watered down even more than in the no-lawsuit states, since the courts remain open to all accident victims.

In both the no-lawsuit and the add-on states, there is an additional problem: insurance companies are required to offer only a limited amount of no-fault coverage--in some states only a few thousand dollars. This leaves anyone with a serious injury no choice but to resort to the courtroom. An exception is Michigan, which enacted no-fault in 1975. Michigan is a no lawsuit state with a tough verbal threshold: only accident victims who can show that they have suffered "serious impairment of the bodily function' or "permanent serious disfigurement' have access to the courtroom. (Families of those whose injuries result in death may also sue.) By saving on court costs, Michigan is able to offer unlimited no-fault medical benefits; there is no cap on what victims like Faith Ann Glynn can collect from their insurer. At the same time, Michigan enjoys low auto insurance premiums: in 1983 the U. S. Department of Transportation found them to be 17 percent lower than they would have been had no-fault not been enacted.

Auto didacts

Why the compromises that have proven so damaging everywhere but Michigan? Blame a small group of self-interested professionals who see a serious threat in the passage of tougher nofault laws. Most of the nation's trial lawyers earn their bread and butter through tort law; fees for auto accident cases alone top $1 billion annually. Obviously these fees are threatened by no-fault. While upwards of 80 percent of all tort cases-- and certainly all high-stakes tort cases--require the services of a lawyer, only 15 percent of all no-fault claims do (usually for dealing with the insurance company). True no-fault would bring that 15 down closer to zero. Small wonder, then, that the lawyers have done everything they can to strangle no-fault in the crib.

The Association of Trial Lawyers of America annually doles out hundreds of thousands of dollars in political contributions, aimed primarily at issues related to tort law, including no-fault. ATLA can take much of the credit for the defeat of a bill before Congress in the late 1970s that would have required states to adopt no-fault laws with minimum coverage of $100,000 for medical expenses and $24,000 for rehabilitation. Equally important have been local groups operating at the grass-roots level, like ADOPT (Attorneys Devoted to Ohio People Totally), which targeted state legislators who favored no-fault.

Lawyers have an additional advantage in manipulating the system because they tend to be active in political campaigns. Consider the experience of one 1972 Democratic candidate for governor in a major northeastern industrial state. "In community after community,' said one key aide, "we checked and found that plaintiffs' lawyers were campaign or finance chairmen . . .. They would not have tolerated a pro-no-fault stand. Our organization might well have fallen apart.' Unlike, say, steelworkers, trial lawyers can organize their time schedules by obtaining continuances past election day; indeed, in election years, from November 15 on, trial calendars frequently are jammed and most courthouses look like Grand Central Station. Lawyers are also vastly overrepresented in state legislatures across the country. The brotherhood of the bar obviously is felt when it comes time for a roll call.

Of course, the trial lawyers insist that more is at stake than their own self-interest. "We don't give a damn what the cynics say,' says one former ATLA president. "We want our views debated not on who represents them but on who they affect, and that's our clients, the consumers.' The argument runs something like this: 1) the great common-law tradition guarantees victims their day in court; 2) by taking cases on a contingent-fee basis, whereby an attorney is paid nothing up front but instead works for a percentage of any trial awards, plaintiffs' lawyers assure that worthy claims will be prosecuted; 3) "pain and suffering' constitutes an important and real part of loss and should be accounted for in determining appropriate compensation; 4) by punishing drivers who do things we don't want them to do, the tort system deters socially detrimental behavior; 5) contrary to supporters' assertions, no-fault actually increases auto insurance premiums.

Let's set aside 1) and 5) for the moment. The problem with 2) is that contingency fees typically swallow up a third of any jury award; some lawyers go as far as to charge 50 percent. Even assuming this incentive system is fair, it does nothing to help those whose injuries come about because of their own fault (the fellow who runs into a tree or into another driver) or those who suffer in an accident where fault is not easy to assign (the fellow late for an appointment who runs into the fellow daydreaming about the woman). Indeed, the tort system makes the latter case worse since the need for each party to prove the other unambiguously guilty contradicts the legal standard for going to jury in a civil case in the first place--a set of facts about which reasonable men may disagree.

As for 3), the "pain and suffering' endured by the victim of any accident is difficult to translate into a dollar figure; indeed, the worse the suffering, the more sadly inadequate monetary compensation of any kind seems. And what about the "pain and suffering' endured by accident victims like Robert Demichelis who can't blame their fate on someone else? Should their economic needs go unmet while we grope to meet the less tangible needs of others? If we are going to spend money on people who are suffering, shouldn't we put a priority on addressing problems we can solve, like unpaid medical bills?

Moving on to 4), the punitive effect of the tort system is undermined by the fact that almost all court awards are covered by a wrongdoer's insurance, with the result that a negligent driver will feel the brunt of his sins only marginally in the form of hiked insurance premiums. Not surprisingly, comparisons of fault and no-fault jurisdictions show no statistically significant difference in the number of accidents. In the case of the criminally reckless driver, the proper solution is vigorous enforcement of criminal laws. If a drunk or excessively careless driver poses a serious menace to society, he ought to lose his driver's license or even go to jail.

The arguments that carry the most weight with the public, legislators, and state judges are those based on the "right to sue' and the alleged higher cost of no-fault. Local courts in Washington, D.C. and Florida have declared threshold requirements unconstitutional insofar as they discriminate against some claimants' opportunities to collect damages for "pain and suffering.' (The issue is now moot in D.C., where the city council recently gutted its no-fault statute.) Although several consumer groups, including the Consumers' Union, the nation's largest, have come out squarely behind the expansion of no-fault, other consumer advocates--most notably, Ralph Nader --have avoided the issue, most likely because it conflicts with the notion that the right to a day in court is fundamental to keeping misbehavior in check. This is certainly true when General Motors is building Corvairs that are killing people; we wouldn't want manufacturers to escape liability for products that cause the rest of us serious harm. But the case of the lone driver, whose limbs are as much at risk as those of whomever he hits, is qualitatively different. Moreover, the success of no-fault in Michigan shows that a tough no-fault law can still leave room for those with the greatest claim of "pain and suffering' to go to court and receive additional compensation for serious disfigurement. Such people may deserve special treatment in our society, and a properly written no-fault law can accommodate them.

In addition, there's a precedent for denying court access to potential tort claimants as long as they are granted other benefits in return: worker's compensation. Worker's comp laws deprive employees of the right to sue employers for injuries occurring at the workplace but do guarantee victims adequate, if not particularly extravagant, compensation regardless of questions of fault. All 50 states now have such statutes, and imperfect though they may be (see "Adding Insult toInjury,' Teresa Riordan, March 1984); nobody is suggesting a return to fault-based in that area.

As for the cost problem, it is true that car owners in some no-fault states have seen substantial increases in their insurance bills. This has been the primary reason for the repeal of no-fault laws in Nevada, Pennsylvania, and the District of Columbia. But inflated premiums are only the logical result of introducing no-fault without correspondingly restricting the right to use. No-fault proponents have never pretended that you could save money unless access to courts was severely restricted. And, in fact, in the states with restrictive verbal thresholds--Florida, Michigan, and New York--insurance rates have been less than they would have been had no-fault not been enacted.

In spite of all the compromises, it's worth noting that even watered-down no-fault laws can claim success on several fronts. According to the Department of Transportation, no-fault compensates more people (roughly twice as many) with greater benefits (79 percent more) in quicker payments (almost all no-fault payments, as opposed to only half of all tort awards, are made during the first year following injury). No-fault also has benefited taxpayers: while no-fault hasn't reduced lawsuits as much as it should have, thousands of accident-related small claims have been kept out of court. Since the average jury tort case costs the taxpayers $8,300, those thousands of cases add up to millions of dollars saved. To cite just one example, during the four years before no-fault was enacted in Massachusetts in 1971, the average number of automobile accident tort cases annually was nearly 32,000; during the four years that followed enactment, that average dropped to 12,000.

There is one last benefit no-fault might bring to our society: it might cure us of the habit of minimizing our own fault and maximizing that of others. There is something depressing about a process that encourages people to behave suspiciously at best and dishonestly at worst. Lawsuits over automobile accidents, where frequently both drivers were somewhat at fault, are forums where the tendency to lie is particularly strong. Even the most public-spirited among us can find ourselves subtly distorting the truth in the courtroom. It isn't worth the queasy feeling that results. Let's give no-fault another chance.
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Copyright 1986, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:no-fault automobile insurance
Author:O'Connell, Jeffrey
Publication:Washington Monthly
Date:Apr 1, 1986
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