No-Fault Insurance Leaves Consumers with Less Coverage and Higher Rates

The Senate Commerce Committee recently held a hearing to consider a new bill that is designed to replace state auto insurance laws with a no-fault system backed by a coalition of insurance companies led by State Farm.

The bill, S.B. 837, can be simply explained this way: Consumers would give up their right to compensation for pain and suffering in the event of an accident and agree to other drastic reductions in benefits. Based on that cut-back benefit schedule, the federal government predicts (but does not guarantee) savings for motorists of $35 billion a year. It would be up to the insurance companies to pass the savings along to consumers.

Imagine: The insurance companies are lobbying Congress for a law that will save you money. Of course, there is a catch

Ten states already have mandatory no-fault insurance laws, and another dozen have hybrid no-fault systems under which civil lawsuits and compensation are not restricted. No-fault states are consistently among the most expensive for auto insurance premiums in the nation.

State-wide referendums in California (twice), Arizona and Florida have defeated no-fault proposals that were heavily funded by the insurance industry. No state has adopted no-fault since 1976. Because no-fault insurance pays both the victim and at-fault drivers, it is not surprising that states with no-fault insurance often have higher rates for coverage.

Giving up pain and suffering compensation is no small matter. No-fault systems treat human injuries much like a damaged fender, allowing only a pittance to be recovered for medical and wage-loss expenses.

J. Robert Hunter is an advocate of the type of no-fault insurance Michigan offers — it includes unlimited medical benefits. As an actuary for former federal and Texas insurance commissioners, Hunter’s advice is influential. Two years ago he testified before a Congressional committee about a proposal similar to S.B. 837: “Savings outside of benefits are little under Choice…. In order to achieve an overall 30% reduction in personal auto costs … benefits paid victims must be reduced by over 50% to achieve the bill’s price goals.”

To Hunter, the legislation being proposed now is altogether the wrong kind of no-fault program because the vast majority of purported savings come not from increased efficiency but from sharp cuts in benefits to accident victims.

Hunter also believes that no-fault and fault systems cannot coexist for long in any state, because collisions between different vehicles — one with a fault insurance policy and the other with a no-fault policy — would lead insurers to surcharge policyholders until they are driven into the no-fault policy arena.

That stacks the deck in favor of the insurance industry. It also abandons the basic notion of driver responsibility, and it requires careful drivers to subsidize their negligent counterparts.

In 1988 voters in California passed a referendum to reform automobile insurance laws. The referendum imposed a rate rollback and a temporary freeze on rate increases. It also required regulatory approval of future rate increases, opened up the insurance companies’ books, eliminated the antitrust exemption for the insurance industry, and made a driver’s record a key factor in the price Californians pay for auto insurance, among other reforms.

The result was that auto premiums actually fell one-tenth of 1 percent in California between 1989 and 1995 while premiums throughout the rest of the country rose 32.2 percent. California went from having one of the fastest rising auto insurance rates to one of the slowest in the past decade. Between 1989 and 1995 California motorists saved about $14 billion.

California has always been an expensive place for auto insurance, but since 1989 a measure of price sanity has prevailed and insurance companies have reduced their bureaucratic waste to stabilize what was once an endless downward spiral.

For more information write to Harvey Rosenfield, 1750 Ocean Park Blvd., Santa Monica, CA, 90405. Rosenfield has led the consumer drive to reform California’s auto insurance system.