With the presidential election coming up, just about every issue seems to get debated. But of all the contentious issues out there, car insurance generally doesn’t make the list — unless, of course, you’re talking about no-fault insurance (also known as personal injury protection or PIP).
What is no-fault insurance?
No-fault coverage is currently available in 12 states and is designed to help pay for medical-related expenses after an accident. If you live in a no-fault state and sustain injuries because of a crash, you’d file a claim with your own insurer, regardless of who was at fault in the accident.
The idea is that by cutting out the sometimes lengthy fault-assigning process, you’d be able to seek medical care right away, avoid a nasty lawsuit, and lower your premiums (by cutting out potential litigation and administrative costs).
In theory, the practice is faultless. In execution, however, it proves to be somewhat controversial. So as many states (Michigan, New York, New Jersey, Florida … just to name a few) implement insurance reform, we thought we’d take a moment to break down the big debate.
A brief history of no-fault insurance
The traditional insurance system in the U.S. relied on tort law-based liability, or in less insurance-y terms, using litigation to resolve claims. But in the 1930s, a group of academics proposed an alternative approach to car insurance — based on our workers’ compensation system — that took fault out of the equation. The aim then was the same as it is now: to ensure swift claims resolution while cutting out lawsuits for pain and suffering.
But it didn’t garner much interest until 1965, when 2 professors amended the proposal. Under this new system (known as limited-tort), people would have the right to sue if they suffered serious, debilitating injuries or if medical expenses exceeded their no-fault benefits.
This system was much more attractive to insurers and legislators, and in 1971 Massachusetts became the first state to implement no-fault insurance. Many other states soon followed suit. In its heyday, 24 states had some form of no-fault law.
So what happened? Why did so many states repeal their laws? And why are so many now looking at insurance reform?
The cons of no-fault coverage
Opponents of no-fault insurance argue that it increases premiums and opens the door to fraud. And here’s why.
The high cost of insurance premiums
Part of the original intent of no-fault laws was to lower insurance premiums. In actuality, however, states with no-fault insurance laws tend to have higher car insurance rates. According to RAND (a nonprofit organization dedicated to objective research), by 1987 insurance premiums in no-fault states were 12 percent higher. And by 2004, that difference swelled to a whopping 73 percent.
Many attribute the higher rates to the high cost of no-fault claims, in part due to medical costs. Since PIP coverage can help pay for everything from medical treatment to chiropractic visits to prosthetic devices, those in no-fault states tend to make more medical claims than those in other states. Plus, since no-fault coverage can provide superior protection — for example, in Michigan, PIP has no limits — it stands to reason that more coverage would cost more.
The prevalence of car insurance fraud
Because of how no-fault insurance laws function, it’s easy for scammers to defraud the system by falsifying records, inflating medical bills and injuries, and even staging car accidents. No-fault states like Florida and New York have historically had a problem with fraud.
In 2011, for instance, the National Insurance Crime Bureau (NICB) named Florida as the state with the most questionable claims from staged accidents. New York came in second.
And in February of this year, New York law enforcement uncovered the largest no-fault insurance fraud case in history. An organized fraud ring of 36, including 10 doctors and 3 lawyers, was charged with defrauding insurance companies of more than $279 million.
The pros of PIP
On the other hand, proponents of personal injury protection argue that it provides a quality safety net — exactly what insurance is supposed to do. By cutting out the fault-finding process and providing generous benefits (in some states), people can get the care they need right away without financial burden. And that’s a boon for those who don’t have adequate health insurance.
Other pros include:
- Faster claims resolutions (since you don’t have to wait for the official word on fault)
- Reduction in the number of lawsuits (since PIP laws limit when you can sue for pain and suffering)
- No need to worry about uninsured drivers (since you file a claim with your own insurance company, it doesn’t matter as much if the other driver is uninsured)
Your opinion on no-fault
As PIP reform makes headlines in Michigan, New York, Florida, and around the country, let us know what you think. Is no-fault faulty or faultless? Leave a comment below or on Facebook to weigh in on the debate.
Read the full RAND report (PDF)
Get a comprehensive look at how the no-fault system has fared.