by Peter Kinzler, author of Highway Robbery; The Two-Decade Battle to Reform America’s Automobile Insurance System
If you think your auto insurance costs too much, you are not alone. Nearly everyone does. That is why, particularly in times of rising rates, there is public support for reforms that promise lower rates. As auto insurance is regulated at the state level, the demand for reform typically depends on the rates in any particular state. To see if there are changes that could help reduce what you pay for auto insurance, let’s start by looking at the highest cost in states today. Then, I will examine the reasons premiums are so high in those states and what changes might help reduce rates. Finally, I will discuss the largest single impediment to achieving reform: trial lawyers, the people whose economic interests would be adversely affected by reforms. They are the main reason why the auto insurance system remains too costly and why those changes are so hard to achieve.
In 1997, Louisiana and Michigan ranked as the twentieth and fifteenth most expensive states in auto insurance premiums. Not particularly high nor particularly low. Twenty years later, they were vying for the unwanted title of the most expensive auto insurance state in the country, words no driver in either state wants to hear. What changed in the intervening years? Was the source of the problem the same? And what can be done to remedy the problems?
Alas, the answers are not simple, starting with the fact that the two states have auto insurance systems that are polar opposites. Louisiana has a fault-based system under which the right to recover is based largely on the other driver’s degree of fault and the amount of any recovery is based on the level of the other driver’s coverage. The only way a driver can protect themself is to purchase health insurance or its auto insurance equivalent, MedPay. Both of those coverages are ones the driver pays for.
Michigan, by contrast, operates under a no-fault system. Like health insurance, no-fault pays for an injured person’s losses without regard to fault. To pay far more injured people more money than the fault system and to keep premiums from rising, no-fault laws limit lawsuits for pain and suffering (non-economic loss), typically to some defined set of very serious injuries.
To understand how to fix both the Louisiana and Michigan laws, you must first understand why some states have fault laws and some have no-fault laws and how most of them fail to deliver what insured people need—prompt, fair compensation in a timely manner for a reasonable price.
All states started with the fault system. Then, in 1932, a Columbia University study of the fault system identified inadequate compensation as the major flaw in the fault system. Later, in the mid-1960s and early 1970s, law school professors Robert Keeton and Jeffrey O’Connell and a twenty-six volume US Department of Transportation study expanded on the system’s deficiencies. They found that the requirement of fault deprived more than half of all victims of any recovery and that the system for determining fault—with the involvement of insurance claims adjusters, lawyers, and often the courts—took too long and paid almost twice as much to lawyers as it paid for the medical bills and lost wages of accident victims.
They recommended switching to a no-fault system that paid all injured persons without regard to fault, with the cost of the additional compensation being offset by strict limitations on the right to sue for pain and suffering. As the new system would deprive lawyers of substantial income, the lawyers fought back in two ways. First, they tried to preserve the fault system by proposing changes to it to improve compensation. Where that failed, they sought—and usually succeeded—in undermining the restrictions on lawsuits in no-fault states (called thresholds). That enabled them to sue in more cases than no-fault proponents wanted, undermining the basic no-fault trade-off and resulting in higher costs. The trial bar then turned around and argued against no-fault in other states and at the federal level on the ground that premiums were too high. As a result of these changes in the fault system and, in some cases, the creation of no-fault systems, compensation for injured persons improved. However, for reasons I will discuss later, only no-fault (done properly) can deliver both better compensation and lower premiums.
So, let’s start by examining Louisiana. As I mentioned, as a fault state, an injured person in Louisiana can only recover if the person was injured by another driver’s negligence. That standard has always denied recovery to nearly one-third of all people injured in accidents, those involved in single-car crashes, because no one is at fault. That will never change. Until the late 1960s, it also meant no recovery if the injured motorist was even partially at fault, the contributory negligence doctrine. These and other restrictive doctrines were the reason more than half of all injured persons recovered nothing in auto accidents in the late 1960s.
Louisiana joined fault states in seeking to remedy the compensation defects by making it easier to recover. Perhaps the most dramatic change was adopted in 1996, just one year prior to the time Louisiana ranked twentieth in premiums. The state moved to a pure comparative negligence standard, whereby motorists recover based on their percentage of fault, even when they are almost entirely at fault. In a worst-case scenario, a motorist who is 90 percent at fault could recover more than the person who is 10 percent at fault. That can happen if the primarily at-fault motorist suffers $90,000 of injuries and the largely free-from-fault driver suffered $5,000 in injuries. Advocates for change in Louisiana also contend that the state’s civil justice system contributed to the higher rates by encouraging settling all claims for policy limits ($15,000). Whatever the exact causes were, they all resulted in improved compensation. However, it is axiomatic that paying more injured people more dollars within the confines of the same system is more costly than paying fewer people. As a result of changes in the fault system and on the insurance side, the average premium jumped from $954 in 1997, placing the state twentieth in the country, to $2,480 in 2020, moving to second.
What was not the source of the dramatic rise in premiums was that Louisiana drivers had more accidents. The number of accidents in the state was in line with the rest of the country, but the number of claims was twice the average rate. Among the “reforms” adopted in 2020 were requiring an injured person to post a $5,000 cash bond within 60 days in order to file suit and changes in the collateral source doctrine. Supporters contended that these and other changes adopted by the legislature in 2020 would reduce premiums by 25 percent. Only months after the new law was adopted, one of the key insurance supporters of the changes said that Louisiana was likely to remain the most expensive state in the country. Even should the new law succeed in reducing rates somewhat, it will be because it will reduce compensation for injured persons, some of whom won’t be able to meet the new law’s financial requirements to bring suit.
If increasing compensation under the fault system addresses one problem (inadequate compensation) while creating another (higher premiums), is there a way to achieve both better compensation and lower premiums? Strangely, the answer lies in examining the Michigan’s no-fault system, which pretty much shares the top spot with Louisiana for the highest premiums.
The Michigan law, adopted in 1973, most closely resembles the model state law and the federal no-fault bills that were considered by Congress for most of the decade. While the federal bills floundered, Michigan succeeded in adopting a law with very generous benefits—including unlimited medical and rehabilitation—without increasing costs initially. It accomplished better compensation by a trade-off—guaranteed benefits in return for limiting the right to sue in very serious injury cases. The underlying concept is that motorists largely give up the right to sue for pain and suffering in return for an assured right to recover for their medical (and wage) losses, just as they do with health insurance. In fact, no-fault auto insurance is largely health insurance by another name.
The law provided benefits for all the roughly 50 percent of injured people who could not recover anything from the fault system at the time. The cost of providing guaranteed high levels of benefits to all injured people was offset by the dramatic reduction in lawsuits and the accompanying attorney fees. Its “threshold” to sue reduced both recoveries of pain and suffering in cases of small injury and the costs of attorney fees. In fault states, both of these categories exceeded the amount paid from the insurance dollar for out-of-pocket costs.
The Michigan law was an unqualified success for some twenty-five years, with the state’s premiums ranking only fifteenth in the country in 1997. Why, then, is it in a virtual tie with Louisiana as the most expensive auto insurance state today? And why do 25 percent of motorists drive without insurance? Common sense provides the obvious answers—the difficulty of predicting human behavior, changing attitudes, and ticking time bombs in the legislation. No legislation is ever perfect. It is the job of the supporters of major legislation to monitor its implementation for possible issues that might arise and to be prepared to defend its integrity and make any necessary changes to preserve its purposes.
The Michigan law started off ideally from the standpoint of its supporters, both substantively and politically. Substantively, it benefitted from the findings of the deficiencies of the tort system in a twenty-six volume US Department of Transportation study in 1970, a model state law in 1973, and the early political experience of the US Senate in considering and developing legislation. Politically, Michigan benefitted from support among the major players across the political spectrum—from Republican Governor George Romney to the powerful United Auto Workers. It even had the support of the Michigan Bar Association, though not the trial bar. The law also had the benefit of being in a midwestern state where there were fewer trial lawyers per square mile than in other states with large urban centers, such as New York, New Jersey, and Pennsylvania.
These differences from the eastern states enabled the Michigan law to operate as intended for roughly twenty-five years, with much better compensation and steady rates. The one unintended problem was that the law was mandating the Cadillac of insurance for all people, including those who could afford a Ford, at best. The result has been uninsured rates as high as twenty-five percent in Detroit and other areas with many low-income people. They need a much less costly form of insurance, one that would permit them to balance protecting themselves against injury with far more desperate needs to feed their families and pay the rent.
Where cost problems arose in other no-fault states, the primary reason was the retention of too many lawsuits. In all of them, the portion of the premium for lawsuits is higher than for the no-fault benefits. That is not the definition of a no-fault system. By contrast, in Michigan, the problems are primarily associated with its very generous no-fault benefits. Unlike in other no-fault jurisdictions, most of the cause of rising rates were the result of problems on the benefit side of the law. First, the benefits were higher than in any other form of insurance in the United States. There is no health insurance policy—Medicaid, Medicare, or private health insurance—that pays all the costs of all injuries with no limits. The original Michigan law had few of the cost controls that are traditionally contained in health insurance policies, such as deductibles, copayments, fee schedules, and limits on certain kinds of providers and the number of visits. Over time, particularly in serious injury cases, the absence of these common limitations resulted in skyrocketing benefit costs. Take, for example, personal attendant care for seriously injured people. It’s a wonderful idea if we as a society had unlimited resources. Medicare does not offer such coverage nor do traditional health insurance plans. The cost of these and other care for the very few catastrophic injury cases in Michigan eventually overwhelmed the costs of all other injuries combined.
Despite its very tight restriction on the right to sue, Michigan ultimately was not immune to its courts weakening the initial interpretation of and permissible grounds for suit. The Kreiner decision in 2010 made it easier for people to bring cases. With the cost of no-fault benefits rising well beyond the level originally anticipated and with the threshold weakened, this double whammy led to consistently rising rates until Michigan arrived in a virtual tie with Louisiana as the most expensive state for auto insurance in the country.
Thus, Michigan was faced with making reforms on both the no-fault and fault sides of the law. Recent reforms, which went into effect in July 2020, are beginning to bring down costs. People are now permitted to purchase lower levels of benefits, from $250,000 to $500,000 and $50,000 for people on Medicaid. Motorists can also opt out of buying no-fault coverage if they have qualified health coverage that applies to auto accidents. There is a fee schedule for medical providers and hospitals, although it is generous, starting at 200 percent of the Medicare rate before declining on an annual basis. Motorists now also have a managed care option, with deductibles and copayments, in return for a lower premium. Importantly, with regard to the cost of unlimited coverage, the new law limits reimbursement of family members who provide personal attendant care services to fifty-six hours a week.
So far, the reforms have led to a 60 percent drop in the charge for catastrophic coverage. Also, the option to purchase lower levels of no-fault benefits will bring down costs, but more needs to be done to fulfill the promises of no-fault. Further tightening on the benefit side will also reduce costs while leaving injured Michigan motorists with the most comprehensive coverage for auto accidents of any state in the country.
Stepping back for a minute from the problems in Louisiana and Michigan, think about what states had the highest premiums when the no-fault issue first arose in the mid-1960s. They were states with large urban populations where more accidents occurred and states with large, aggressive attorney populations. They included New York, New Jersey, and Florida. On the other hand, the lower cost states were largely rural where there were far fewer accidents, although many resulted in serious injuries. They included North Dakota, Maine, Iowa, Idaho, and South Dakota.
Nearly fifty years later, these states still fit into the same categories of cost, regardless of whether they have fault or no-fault laws, and the question remains: is it possible to lower premiums while improving compensation for the injured?
The short answer is yes. My recently released book, Highway Robbery: The Two-Decade Battle to Reform America’s Automobile Insurance System, describes in detail one way to solve the problems not only of Louisiana and Michigan but of all other states, be they tort or no-fault states—Auto Choice. In tort states, motorists would have the option to purchase no-fault coverage that will pay in all injury cases, just like health insurance, but with coverage for roughly twice the level of the existing fault coverage (about $50,000) so that it is not so high that it prices low-income drivers out of the market. Also, there would be cost controls in the auto insurance system, just as there are with health insurance, and coordinating payments for injuries between the health and auto insurance systems holds out the potential for substantial cost savings by eliminating duplicate payments. The threshold would limit lawsuits based on fault to cases of excess economic loss—economic loss beyond the level covered by the no-fault benefits. No suits for noneconomic damages would be permitted except against drunk drivers and those who intentionally injure others. In July 2003, the Joint Economic Committee of the US Congress estimated that the average driver in Louisiana who chose the no-fault option would see a drop of 70 percent in their personal injury premiums.
In no-fault states, the no-fault option would address the problems in no-fault states caused by both uncontrolled benefits and weak thresholds. The benefit levels would be modest, but about twice as much as one could recover in a fault state. The threshold would be the same as described above, eliminating all suits for non-economic loss. The 2003 JEC estimate of savings for the average person on their personal injury premiums for Michigan was 61 percent.
Importantly, the concept of Auto Choice would allow drivers choices they don’t have today—a choice between two different auto insurance systems and, if they choose the no-fault option, to pick the level of no-fault benefits and to opt out of the choice system entirely if they wish. They could choose simply to remain in the system that was in place in their state before this legislation was passed. In effect, the option to remain in the state’s existing system would provide fail-safe protection should the no-fault option not work as intended. That’s the kind of guarantee that simply isn’t offered in legislation.
Now all that’s needed are some politically courageous politicians in state capitals to resist the political pressure from those who would lose money under such a system—trial lawyers and insurers. At last count, about ten years ago, lawyer fees exceeded $11 billion a year. They won’t give up that largely easy money easily. Strong pressure from a public fed up with unnecessarily high premiums offers the most hopeful answer, with crowdfunding financing the effort instead of special interest money, and a little organizing help from that highly unpopular but often effective group—lobbyists.
Peter Kinzler served for twenty-five years as a staffer in the US House of Representatives and the US Senate, most as a subcommittee counsel, and for ten years in the private sector as president of the Coalition for Auto-Insurance Reform. He is the retired president of Kinzler Consulting and lives in Alexandria, Virginia.