“Choice” No-Fault and Other Recent Proposals

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The passage of Proposition 103 represented a dramatic turning point in the insurance reform debate. Driven by the California initiative, insurance industry reform occupied the focus of policymakers throughout the United States. Proposition 103‘s passage inspired similar efforts in nearly every state legislature in the nation.1

In response, insurance companies promoted no-fault as an alternative in dozens of states. But as described in another file on this web site, the failure of the no-fault laws in effect throughout the nation provided little basis for the industry to argue for the adoption of no fault laws elsewhere.

Indeed, the industry’s intensive promotion of no-fault as an alternative to insurance industry reform has been a complete failure. Industry-sponsored no-fault legislation was defeated in high profile battles in several states.

Arizona voters rejected a no-fault ballot measure in 1990 by 85.1% to 14%.2 As discussed below, a “pure” no-fault ballot measure was placed before California voters in March, 1996; it was rejected by 65% of voters despite a $19 million campaign in its favor. In Hawaii, a “pure no-fault” measure sponsored by State Farm Insurance was approved by the Legislature but vetoed by the Governor.3

Indeed, the emphasis in no fault states has shifted to repealing no fault. Since 1988, there have been serious efforts to repeal no-fault laws in at least six states; three were successful.4 Georgia and Connecticut repealed their no-fault laws. In New Jersey and Pennsylvania, no-fault laws were made optional. Industry opposition blocked major efforts to repeal no-fault systems in Massachusetts (1992) and Hawaii (1995 and 1996).

Confronted with the demise of existing no-fault systems, the insurance industry re-packaged no fault. Various academicians, consultants, and organizations funded by the insurance industry now promote these new versions, complete with a new propaganda playbook. It includes:

  • portraying no-fault as good for people on low incomes;

  • sponsoring “independent” non-profit organizations claiming to represent minorities and consumers;

  • refusing to use the term “no fault” to describe the proposals.

There are two main no-fault proposals, both of which have been decisively rejected by voters in California and Washington, D.C.:

“Choice” no fault.

“Pure” no fault.

1. “Choice” no fault

Proponents of “choice” no fault try to get around public antipathy towards no fault by arguing that their plan would give consumers the “choice” of whether to buy a no fault policy or stay with the traditional personal responsibility (liability) system. 5

While the insurance industry’s P-R people apparently believe “consumer choice” sounds better than no-fault, the term is a misnomer, and the proposal a fraud. The “choice” is illusory. Motorists who choose to be covered by the traditional liability system are still prohibited from suing a negligent motorist who has chosen to be covered under the no-fault option. To obtain pain and suffering coverage, the motorist operating under the tort system must purchase it as a first-party coverage from her own insurer. Thus, a potentially negligent driver’s choice to operate fault-free overrides another driver’s choice to operate in a personal responsibility system in which negligent drivers may be held accountable. Drivers who choose no-fault simply impose their choice on drivers who do not.

Like the “pure” no fault proposal described below, the “choice” system would completely prohibit claims for non-economic damages, known as “human pain and suffering,” no matter how grievous the injury of the innocent victim and his family.

Congressional “Choice.” Legislation that would preempt state auto insurance laws and create a federal no-fault system based on the “choice” plan has been introduced in the United States Congress and heavily promoted by State Farm and other insurance companies. While auto insurance has traditionally been an issue left to the states, the insurance industry has focussed on Congress because no state legislature has been willing to seriously consider the proposal.6

Proponents of federal “choice” legislation have equated auto insurance premiums with taxes, insisting that “choice” no fault would “cut taxes” by $45 billion nationally.7 However, nothing in the legislation requires any reduction in premiums. The following analysis applies to S.837, introduced in the U.S. Senate.

  • The legislation states that, if approved, it supersedes a state’s insurance laws, unless the state’s insurance regulators finds that S. 837 will not lower rates for no fault drivers by 30%. This “finding” is, of course, not a rate reduction. A general finding by a state regulator has no application to specific insurance companies or to specific consumers.

  • In any event, many state regulators do not have either the authority or resources to effectively review premiums. While the legislation overrides state tort laws governing the protection of consumers, it provides no authority for state regulators to order refunds, or to lower rates, even if such reductions could be justified.

  • Assuming state regulators had the authority, resources and inclination to order a substantial premium reduction, across the board rate reductions are subject to legal challenges by insurance companies, and no insurance company can be forced to reduce its rates if such action would deprive it of a fair return. See Calfarm, 48 Cal.3d 805, 815. Another fatal defect may be the process by which insurers can seek relief from the reduction. If the state statutes which the federal legislation says are to govern the rollback process do not contain the constitutionally-required due process hearing protections, the courts will strike down the rollback. See Guaranty National Insurance Company, et. al. v. Gates 916 F.2d 508 (9th Cir. 1990) distinguishing Proposition 103‘s due process protections.

  • Assuming again that state regulators had the authority, resources and inclination to order a substantial rollback, S. 837 does not prevent insurance companies from arbitrarily or unjustifiably increasing rates prior to the effective date of S. 837, thus enabling insurance companies to reduce their premiums while in effect making no net rate reduction. Nor does S. 837 prohibit insurers from raising premiums one day after reducing them.

The Insurers’ Broken Promises. Insurance companies never lower premiums voluntarily. Insurers favor no fault precisely because it costs more to pay for both the wrongdoer and the innocent victim of a car accident. Since insurers make most of their profit from the investment of premiums, high-revenue programs like no fault are preferred by insurance companies, particularly in regulated markets, because they can justify passing through to consumers the higher costs, along with their higher markup for profit and other excessive expenses. Higher costs equal higher premiums. Higher premiums provide more capital to invest. More investment capital means higher profits.

Since the Proposition 103 campaign in California in 1988, insurance companies have readily promised rate reductions as the political equivalent of a “loss leader” when sponsoring no fault laws. However, these reductions do not materialize.

In the California battle in 1988, insurance companies told voters that their no fault proposition (104) would lower premiums by 20%. However, consumer advocates obtained transcripts of confidential briefings by insurance industry executives which revealed that rates would go up — by as much as 35% in urban areas — rather than go down, if no fault was approved by the voters.8

Hawaii’s motorists were promised a 15% rate rollback, “guaranteed” as part of amendments to the state’s no fault law enacted in 1992. However, virtually all insurers reneged on their agreement to pay the reductions. In 1995, . Governor vetoed a pure no fault bill sponsored by State Farm on the ground that its rate rollbacks were illusory. Governor Cayetano was unwilling to allow the insurance industry to perpetrate a fraud on Hawaii’s motorists a second time.

What is a worthless policy worth? Whether or not a rate reduction would be justified under S. 837 is, of course, a separate matter from whether insurers may be compelled to provide it.

By eliminating the liability of wrongdoers for the pain and suffering (non-economic damage) they cause, and in making other sources of compensation primary, S. 837 effectively negates the value of an auto liability insurance for students, retired people, or those with limited economic losses. For these individuals, a “choice” auto insurance policy would be a worthless investment — even at 30% off present rates.

Indeed, it is disingenuous at best to suggest that “choice” no fault policies would save motorists money when the “savings” comes at the price of an extreme reduction in compensation for accident victims. J. Robert Hunter, a nationally recognized actuary who has served as Administrator of the Federal Insurance Administration and is a former insurance commissioner of Texas, has noted the illusory nature of the purported “savings” estimates under “choice” no-fault. In testimony before the Congressional Joint Economic Committee, Mr. Hunter observed that the vast majority of the purported “savings” under “choice” no-fault would come not from increased efficiencies but from drastic cuts in benefits to accident victims. He concluded that, “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.”9

Choosing a “choice” no fault policy to save money is like cutting off a limb to lose weight.

Does the fact that the “choice” no fault policy will cost insurance companies much less to provide mean that insurers will voluntarily pass through these savings to provide a rate reduction when as noted above S. 837 does not contain require the insurers to lower rates at all? No. Lowered premiums means lowered investment returns; as noted above, history has shown that insurers will not accede voluntarily to rate reductions that will reduce their own profits. S. 837 simply guarantees that insurance companies will reap excess profits from the sale of auto insurance.

“Pure” No Fault

In 1994, a consortium of financial services, utility, high-tech and other firms announced the formation of a lobbying committee, the Alliance to Revitalize California, to sponsor a “pure” no fault initiative for the March 1996 ballot as part of a package of three initiatives to broadly limit access to the courts and the application of the state’s tort laws. Proposition 200 would have:

  • abolished all fault-based tort liability for economic losses (including losses exceeding the no-fault coverage).10 The complete bar to the court system is described as “pure” no fault;

  • abolished compensation for non-economic damages in all cases;

  • required that taxpayer-funded public assistance programs and other forms of private insurance coverage bear the costs of auto accident victims before auto insurers are responsible to pay claims;

  • offered a total of $50,000 in benefits;

  • promised substantially lower auto insurance premiums, without providing any statutory rate reduction requirement;

  • eliminated tort lawsuits against insurers who failed to pay no-fault benefits in good faith.

Recognizing that an insurance industry-sponsored ballot measure would have little chance of approval, the no-fault campaign strategy was to rely upon the financial resources of business groups supporting the other two “tort reform” measures to limit the need to accept insurance industry money for the no-fault campaign prior to the election. After the election, insurance companies donated nearly $1 million to help pay debts of the failed campaign, according to reports on file with the California Secretary of State and the California Fair Political Practices Commission.

On March 26, 1996, the California voters issued a stinging rebuke of no-fault for the second time in eight years. A conservative Californians electorate defeated a ballot measure to establish a pure no-fault auto-insurance by nearly a 2 to 1 margin: No 65%, Yes 35%.11 Proposition 201, limiting lawsuits brought by shareholders victimized by investment fraud, was defeated by 60% to 40%. Proposition 202, which called for limits on contingency fees, lost narrowly by 51% to 49%.

Like S. 837, Proposition 200 was based on a proposal promoted by the insurance industry’s coterie of sponsored academicians, lobbyists and P-R firms. These included corporate consultant Andrew Tobias, Law Prof. Jeffrey O’Connell and Michael Horowitz, recognized leaders of the national corporate campaign to restrict state tort laws, and the Manhattan Institute, one of the industry’s “think tanks.”

Indeed, in the 1996 campaign, insurance companies and other business groups pioneered the use of “surrogates.”

Read a detailed fact sheet describing Proposition 200.

For more about Andrew Tobias, Professor O’Connell, “Voter Revolt” and the political consulting firms that made millions from the insurers’ 1996 no fault campaign, visit our expose of the “Goon Squad.”

For more about the Manhattan Institute, check out the extensive research in our section on “Who’s Behind Tort Reform.”

1. See NATIONAL INS. CONSUMER ORG., supra note 33, at 35-36; Richard W. Stevenson, As California Tells Insurers What To Do, the Nation Listens, N.Y. TIMES, May 14, 1989, § 4, at 5.

2. See PROFESSIONAL INS. AGENTS, WKLY. BULL. NO. 799, at 2 (Nov. 1990).

3. See Ann Botticelli, No Reprieve for No-Fault: House Fails to Muster Votes to Override Cayetano Veto, HONOLULU ADVERTISER, June 30, 1995, at A1.

4. See Groups Push for Auto Insurance Reform, THE ENTERPRISE, Sept. 11, 1992, at 11; Marie Gendron, Nader: End No-Fault, BOSTON HERALD, Mar. 5, 1992, at 39; Ann Botticelli, Maner: Too Late to Use Nader No-Fault Reform Proposals, HONOLULU ADVERTISER, Apr. 13, 1995, at 8; Mike Yuen, Senators Doom No-Fault to Legislative Graveyard, HONOLULU STAR-BULL., July 6, 1996, at A3; Christopher Dauer, N.J. Legislators Propose Bill to Repeal Auto No-Fault Law, NAT’L UNDERWRITER, May 9, 1994, at 2.

5. You can read the details of this proposal by the leading academic proponent of the no-fault system Jeffrey O’Connell (make sure you read about him in our “Goon Squad” report). Consumer Choice in the Auto Insurance Market, 52 MD. L. REV. 1016 (1993); Jeffrey O’Connell et al., Consumer Choice in the Tennessee Auto Insurance Market, 27 U. MEM. L. REV. 539 (1997); Jeffrey O’Connell et al., The Comparative Costs of Allowing Consumer Choice for Auto Insurance in All Fifty States, 55 MD. L. REV. 160 (1996); Jeffrey O’Connell et al., The Costs of Consumer Choice for Auto Insurance in States Without No-Fault Insurance, 54 MD. L. REV. 281 (1995); see also No- Fault’s O’Connell Keeps Trying, Offers a Variation on Choice Plan, AUTO INS. REP. , Mar. 13, 1995, at 1; Jeffrey O’Connell & Robert H. Joost, Giving Motorists a Choice Between Fault and No-Fault Insurance, 72 VA. L. REV. 61 (1986).

6. While State Farm and several other large auto insurers support the legislation, other insurance trade associations have stated their opposition, fearing that federal preemption of state auto insurance laws would inevitably be followed by demands for federal regulation of the insurance industry, which insurers have sought to avoid, so far successfully, since the McCarran-Ferguson Act.

7. Peter Passell, Rep. Armey to Offer Bill Aimed at Cutting Auto Insurance Costs, New York Times, June 11, 1997, at B1.

8. No Fault Insurance Rate Hikes Revealed,” Costa Mesa Daily Pilot, June 24, 1988, P.1. “No Fault Insurance Could Boost Some Rates, Agents Told,” Los Angeles Times, June 24, 1988, p. 3.

9. J. Robert Hunter, Testimony before the Joint Economic Committee of the Congress of the United States, March 19, 1997.

10. Unless the motorist who caused the accident was engaged in criminal conduct or the shipment of hazardous waste, in which case he could be sued.

11. The mostly conservative Republican electorate that sponsors had counted on to be receptive to the proposals rejected the other measures as well. Prop. 201 was defeated by nearly a margin of 3 to 2: No 60% Yes 41%. Prop. 202 lost narrowly: No 51% Yes 49%. News articles and campaign disclosure reports from the campaign are attached in the appendix.

Consumer Watchdog
Consumer Watchdoghttps://consumerwatchdog.org
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