No-Fault Auto: Heading for a Sunrise or Sunset?

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Florida Underwriters

Crisis is probably the most overused word in the insurance lexicon and is often used to blur the fine line between the present state of the market and the fears and desires about the future path of the industry. Case in point is the coming battle over Florida s no-fault auto insurance law. Currently, the state enjoys a robust auto market where rates are generally on the decline, the number of carriers providing coverage exceeds 50, and prosecutors are pleased with the power they have been granted by the legislature to crack down on fraud. Those facts, however, are soon to be overshadowed by what is expected to be another legislative insurance battle on the scale of medical malpractice, workers
compensation, and homeowners insurance.

The coming no-fault battle has its genesis in a decision by the state legislature in 2003, which calls for the state s no-fault law to sunset in October 2007 unless lawmakers reenact the old law or put a new one in its place.

The sunset provision was a classic legislative sidestep designed to delay a battle that will feature that all-too-familiar group of insurers, doctors, and lawyers. By putting in the October 2007 sunset date, the legislature created a scenario that will require lawmakers to start serious work on the issue in the 2006 legislative session, while retaining the option of postponing any final action until lawmakers convene in 2007. Although lawmakers traditionally don’t act until they absolutely have to, the prevailing wisdom in Tallahassee is that the time for the debate over the no-fault law has come.

Florida’s no-fault insurance law is rather simple. It requires every car owner to carry $10,000 in personal injury protection (PIP), which covers the car owner, members of their household, certain passengers that lack their own PIP coverage, and in some cases, other drivers that are operating a vehicle with the owner s permission. The coverage also extends to children who suffer an injury while riding a school bus. PIP pays for 80 percent of medically necessary expenses, 60 percent of lost wages, and 100 percent of services such as child care or housekeeping while the owner is recuperating from any injuries. PIP
coverage also pays $5,000 in death benefits.

Car owners have the option of purchasing additional PIP coverage in which the coverage would pay for 100 percent of medical expenses and 80 percent of lost wages. However, it is much more common for car owners to select a higher deductible to receive a credit that reduces their premiums. Say, for example, a policyholder selects a $1,000 deductible. In this case, if the policyholder has an accident that results in $10,000 in medical bills, the insurer would pay 80 percent of costs minus the $1,000 deductible for a total of $7,000.

The rationale for the no-fault system is that it represents an economic trade-off that provides policyholders with coverage while placing limits on a policyholder’s right to sue their insurance company. Specifically, by assuring the payment of medical and wage loss benefits regardless of which driver is at fault, drivers effectively agree on a limitation on the right to sue for non-economic damages for non-permanent injuries. At issue, however, is one question: Does the no-fault law accomplish its legislative intent? From some insurers point of view, the $10,000 in PIP coverage has become nothing more than a give-away since the monetary amount is so low it may not even cover a trip to the emergency room. Another argument is that by setting out a monetary amount, it creates an economic target for trial lawyers and doctors to reach so they can sue for additional monies.

State Farm Mutual Auto Insurance, the state s largest auto insurer, is leaning toward scrapping the no-fault system and returning to a tort-based system. Mark Delegal, a Tallahassee-based lawyer and lobbyist for State Farm, said that it is too easy for trial lawyers, doctors, chiropractors, and other health service providers to reach the $10,000 no-fault limit. Once that threshold is breached, he said, the lawyers and doctors then take insurers to court over disputed claims and sue for attorneys fees if they prevail. As a result, Delegal argues Florida residents are paying higher rates than necessary because of the problems of no-fault. The premium payers of Florida are not getting a good deal and, absent radical reform, the system has to go away, he said.

Industry Unity Elusive

The industry faces several significant hurdles when it comes to forging a legislative solution to the no-fault system that it can convince lawmakers to support. For one, the industry has yet to create a united front, which privately many insurer representatives concede is unlike to happen.

Some insurers like Nationwide Insurance Company lean toward the State Farm position. Andy Martinez, a lobbyist for Nationwide, said, I m not sure true meaningful reform is within our grasp. In all likelihood, we will favor repeal.

On the other side of the industry, however, there are direct writers such as Allstate Insurance Company, who support retaining the no-fault system with some changes. In prior years, other insurers have floated reforms like requiring all policyholders to carry bodily injury coverage in addition to PIP. Bodily injury liability insurance would pay benefits for traffic fatalities and serious or permanent injuries in cases where an insured policyholder is liable.

The Florida Insurance Council has formed a no-fault committee headed by Rade Muslin, vice president of the Florida Farm Bureau Insurance Company. Muslin hasn’t personally decided whether he favors repeal or reform of no-fault, but says the issue is a paramount concern for the industry.

The decision the legislature faces on no-fault will define the structure of the Florida auto market for the next 10 to 15 years, Muslin said. We are trying to build consensus that change is needed even if we do not agree on all the details, he said. Status quo is not the right answer.

As the insurance industry meets in Tallahassee in person and through teleconference calls this summer and fall, it knows it is going up against a formidable coalition of interest groups that will fight tooth and nail to keep the no-fault system alive in Florida. Doctors, hospitals, and the state trial bar are all working together to defend the current system. At the same time, the industry, in all likelihood, will not have the support of its largest ally an
the group most responsible for the successes the industry has enjoyed in the legislature namely, consumers.

Policyholder Support Lacking

Much has changed in the insurance industry and auto market since lawmakers enacted the no-fault sunset provision in 2003. And in this case, it may be to the industry’s detriment. At the time, the general feeling was that while the no-fault law needed to be addressed, it wouldn t appreciably worsen. Therefore, lawmakers took on the larger issue of workers comp and medical malpractice, where carriers were fairly successful in convincing lawmakers to accept the industry s proposals. One reason for the industry s success was that both issues were framed as pocketbook issues that affected everyday Floridians in the form of higher premiums and access to services.

With medical malpractice, insurers teamed with doctors who were more than willing to lead a parade on why high insurance rates were forcing them to leave the state or no longer practice high-risk operations. There was also the highly emotional issue of whether soaring insurance rates were affecting the ability of pregnant women to be treated by obstetricians. In the case of workers comp, business owners came down on elected officials saying high rates were cutting into their profits and threatening to drive them out of business. Gov. Jeb Bush took that argument to new heights by posing workers comp reform as crucial to the state s economic growth.

But when it comes to PIP reform, there is not the consumer outrage that is generally necessary to embolden lawmakers to substantially reform a line of insurance. This is not a major consumer issue, said Larry Patrick, vice president for insurance and financial Services for AAA of Florida, which represents three million drivers. Auto rates have stabilized and in that environment, there s not a lot of public concern.

Nonetheless, the major insurance committees in the House and Senate are ramping up to spend the next few months studying no-fault and getting input from the insurance companies, the medical establishment, trial attorneys, and others. Absent any more hurricanes, this is going to be our number one issue in the next year, said Rep. Dennis Ross, R-Orlando, chairman of the House Insurance Committee. As his committee, along with the Senate Banking and Insurance Committee, gathers information over the summer and fall, Ross said he has yet to make up his mind on how to proceed. If we can t address the issues of fraud, medical costs, and increased litigation, then it may be best to let the law sunset, he said.

Ross assessment of the issue sounds eerily similar to the words of former House Speaker Jim King, who in 2003 said this about no-fault: Fix it or flush it.

Lawyers and Doctors: No Need for Reform

Lawmakers in 2003 did much more than put in the no-fault law sunset. They also beefed up the ability of law enforcement and prosecutors to pursue and convict individuals engaged in fraudulent behavior. In addition, all PIP medical clinics were required to pay $2,000 to become registered with the State Agency for Health Care Administration. The law also made it unlawful for people with insurance fraud convictions to own or run medical clinics.

State insurance officials conducting a study in January concluded that the revised penalties and other insurance code changes enacted in 2003 have created powerful weapons against insurance fraud. The reforms include rigid clinic licensure requirements and revamped laws against soliciting for crash victims and staging accidents. The Division of Insurance Fraud is extremely encouraged by the impact of the 2003 Florida Motor Vehicle Insurance Affordability Reform Act, the report stated.

The federal government also has been pursuing a multitude of fraud cases that involve sophistic networks of doctors, lawyers, and other individuals committing fraud on a large scale. In July, the U.S. Justice Department and the FBI announced that a grand jury had indicted 22 individuals and four medical clinics for health insurance fraud by submitting fraudulent PIP claims from November 2003 to July 2005. The indictment lists thirty insurance companies including State Farm, GEICO, Allstate, Ocean, and MetLife to which the defendants submitted fraudulent claims. The medical clinics received over $8.5 million in insurance payments as a result of this fraudulent activity.

The lack of policyholder outrage over premiums and the apparent success of the 2003 reforms, which law enforcement officials say are having an impact on the amount of fraud and abuse in the system, will be Exhibits A and B for the trial lawyers and doctors. Paul Jess, general counsel for the Academy of Florida Trial Attorneys, said there is no compelling evidence that supports any substantial reform to the no-fault law. In fact, he said, the opposite is true as measured by the fact that many carriers have lowered their rates in the past two years. Our position is that the changes are now working and we just think the system should be reenacted as is, he said.

Med Fees a Likely Battleground

If the insurance industry could push through any reform, it would be the creation of a medical fee schedule for PIP medical treatment. PIP is one of the last large lines of insurance not to have a fee schedule. In the area of group health, doctors are paid by fees set by Medicare or are negotiated through managed care networks or insurers. A physician and hospital reimbursement schedule has proved crucial to controlling medical cost and utilization in the workers compensation system.

However, when it comes to medical treatment for injuries due to an auto accident, the industry has only been successful in convincing lawmakers to implement a fee schedule for magnetic resonance images. Delegal said the fee schedule proved it could hold down MRI costs, but without placing a fee schedule on other medical services, it just resulted in doctors cost shifting by using other diagnostic tests such as CAT scans. A fee schedule is the most valuable thing you can do because most disputes are over the amounts charged for health services, Delegal said.

The Florida Medical Association and the Florida Hospital Association have vowed to fight any proposal that would implement a comprehensive fee schedule. Furthermore, they will lead the fight to retain the state s no-fault law in its current form. The associations maintain that doing away with the no-fault law will only lead to higher litigation rates for insurers that will be passed along in the form of higher premiums for drivers. We want to keep it, we like it, said Jeff Scott, associate general counsel for the FMA, of the state s no-fault law.

Scott also pointed out that doctors made some major concessions on rates when the legislature last reformed the auto insurance market in 2003 and it is not prepared to make any more of them. I suspect the insurance industry will usethe threat of doing away with no-fault as a way to get some concessions and get the changes to the system that they want, Scott said.

If Florida does away with no-fault, it will join a growing number of states that have done so in the past decade. Mandatory no-fault laws have been repealed in six states and the District of Columbia since 1980. In most of the states, auto insurance premiums have dropped significantly. For example, rates are $145 lower in Connecticut, $76 lower in Georgia, and $156 lower in Pennsylvania, according to the non-partisan Foundation for Taxpayer and Consumer Rights.

No-fault has failed to live up to insurers promises of lower insurance rates. Lower premiums can be achieved by repealing failed no-fault laws and instituting strict rate regulation, said Harvey Rosenfield, president of the Foundation of Consumers and Taxpayers Rights. He is also advocating doing away with the no-fault law in Massachusetts.

According to the foundation’s analysis of premium data as reported by insurance companies to the National Association of Insurance Commissioners:

Premiums are 19 percent higher in no-fault states than in personal responsibility states.

Seven of the ten states where auto insurance was most expensive in 2002 had no-fault or hybrid/choice systems.

Auto insurance premiums rose 92 percent faster in no-fault states than in personal responsibility states between 1998 and 2002.

Direct Market Share Cumulative
Written By Written Market
Company Name Premiums Premium Share

State Farm Mutual $2,274,611,679 19.14% 19.4%
Allstate Insurance $994,852,443 7.95% 27.09%
Geico General $692,121,075 5.82% 32.91%
Progressive American $457,290,535 3.85% 36.76%
Nationwide Mutual $383,372,872 3.23% 39.98%
Progressive Auto $374,557,465 3.15% 43.14%
Progressive Express $373,656,337 3.14% 46.28%
Allstate Property $338,507,352 2.85% 49.13%
State Farm Fire and Casualty $335,284,893 2.82% 51.95%
Government Employees $321,147,394 2.70% 54.65%
United Services $291,559,542 2.45% 57.10%
Allstate Indemnity $285,297,995 2.40% 59.50%
United Automobile $270,275,517 2.27% 61.78%
Direct General $236,244,181 1.99% 63.77%
Geico Indemnity $225,776,196 1.90% 65.67%
Mercury $214,616,578 1.81% 67.47%
USAA $200,484,952 1.69% 69.16%
Geico Casualty $172,718,403 1.45% 70.61%
Liberty Mutual $168,557,273 1.42% 72.03%
First Floridian $149,700,005 1.26% 73.29%
Illinois National $123,039,269 1.04% 74.32%
Hartford $121,642,109 1.02% 75.35%
Property & Casualty Hartford $108,518,339 0.91% 76.26%
Metropolitan Casualty $107,963,015 0.91% 77.17%

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