Whose no-fault is it anyway? - No-fault car insurance

Washington Monthly, Oct, 1989 by Peter Spiro, Daniel Mirvish

Whose No-Fault is It, Anyway?

In America, there are three ways to get rich. You can work hard (but that's no fun). You can win the lottery (perfect--except for the long odds). Or you can get in a car wreck sue. Due to the publicity that surrounds astronomical awards for such dubious injuries as "whiplash," it's this last path to wealth--the fender bender--that sometimes seems to offer the truest promise. Foreigners must be mystified by those American bumper stickers that say, "GO AHEAD, HIT ME--I COULD USE THE MONEY!" This, thinks the visitor from abroad, truly is the land of opportunity, where you can acquire great wealth just by getting you Ford bashed up.

But closer inspection shows this system contains more tarnish than shine. Having your Ford bashed up is only the first step. To actually collect money to pay for treating your broken leg, you have to prove that the crash was somebody else's fault--someone who's either adequately insured or wealthy. This creates all kinds of problems. For one, it means you have to hire a lawyer, who will then pocket 30 to 40 percent of the money the court awards you. It also means you insurance company, which is constantly being sued by other drivers, has to hire lots of lawyers, too, driving up the cost of your premiums. Someone has to pay for all those lawyers, after all, and that someone is you. so up go your premiums.

This system of suits, known as the tort liability system, also means you have to wait--those lawyers with all those suits create gridlock in the civil courts: more than 80,000 auto cases clog the California superior court system alone. coast to coast, the nation's jurists are sifting through one car wreck after another, trying to decide whether Mr. Smith wasat fault for not turning on his blinker in time or whether Mr. Jones was at fault for not seeing it blink. (Never mind that in most car wrecks, actual fault is usually shared--Mr. Smith made a quick turn, but Mr. Jones, who should have been more vigilant, was daydreaming about his girlfriend.) By the time the court gets through all those Smiths and Joneses and turns its attention to you, years are likely to have passed.

Clogged courts, of course, inherently benefit the wealthy and powerful, who have the resources to wait. You, the little guy with the broken leg, have just shelled out $5,000 in medical expenses, and you can't bide your time for three years before collecting, so you settle out of court for half of what you're entitled to in order to avoid complete destribution. The tort system routinely undercompensates people seriously injured in auto accidents, and overcompensates those with minor injuries. After all, those with big medical bills often need to settle, while those with minor injuries can afford to wait--particularly given the chance at "pain and suffering" bonus that has nothing to do with emotional trauma or inconvenience, but is a standard three- or four-times multiple of out-of-pocket costs. A shot at such generosity also creates powerful incentives for outright fraud. No wonder insurers estimate that phony claims now account for 15 to 20 percent of all auto insurance payments.

Sound bad? It gets worse--the endless bickering over traffic cases that ties up the civil courts also keeps out matters that really do cry out for judicial attention. Say you're a small businessman who's been swindled by an unscrupulous contractor; or a parent whose brand-new, but poorly designed, toaster exploded and burned you child; or a black homebuyer denied credit by a racist bank. Chances are you'll have to wait years for justice because the courts are busy listening to Smith's and Jone's lawyers bending the truth about who caused that wreck. Of course this suits the shady contractor and the racist bank just fine; they can afford to wait. It's only you who can't.

"I don't think you could really design a much worse system if you tried," says insurance expert Andrew Tobias. Thanks to the inefficiencies of the liability system, only 44 cents of every premium dollar makes it into the pockets of accident victims. Compare that to 92 cents for Blue Cross health insurance.

Meanwhile, suits are on the rise. In Los Angeles County, tort filings have increased by more than 60 percent in the past two years. In the same county, jury awards for such notoriously unprovable injuries as whiplash and knee pain climbed 42 percent in a single year. As a result of this liability system, auto insurance is an increasingly unaffordable item: A Philadelphia couple with an 1988 Chevy and an 1984 Olds and two clean driving records now pays $2,400 annually for standard coverage. In a number of states, including Pennsylvania and California, the demand for auto insurance reform has emerged as a pivotal political issue; in New Jersey, the issue may decide who becomes the next governor.

Cheap, quick, and fair

What is so maddening about the crisis in auto insurance is that the solution is hardly a secret: no-fault insurance. That concept has existed almost as long as cars themselves (it was first conceived by Judge Robert S. Marx in 1925), and it's been a serious proposition since the publication of Robert Keeton and Jeffrey O' Connell's Basic Protection for the Traffic Victim in 1965. No-fault is cheaper, quicker, and fairer.