The ‘Pure No-Fault’ Initiative, California, 1996

I. Background and Scope

This long (18 pages) and complex ballot initiative, rejected by California voters in 1996, would have eliminated the principle of “fault” in every auto accident case, no matter how severe (except those involving criminal activity). It established a “first party” insurance system: each motorist is responsible to cover his or her own injuries by purchasing a “no fault” insurance policy; in the event of an accident, each motorist’s own insurance company must pay the claim. The initiative was based upon proposals written and promoted by insurance companies and their lobbying groups. State Farm, the largest auto insurer in the nation, has led the effort for the creation of “strict” no fault laws.

II. California’s Present System

California law requires drivers to purchase “liability” insurance for the bodily injuries and property damage that occurs when a motorist causes an accident. People who cause accidents are held accountable for their actions and injured victims have the right to full compensation for their losses and injuries suffered. Accident victims seek compensation for their property and bodily injury losses from the person and the insurance company of the person “at fault.” Only the innocent victim is paid compensation. The person who caused the accident is not entitled to any benefits if he was hurt, unless he has purchased “med-pay” coverage or has his own health insurance policy. There are no arbitrary limits on the victim’s right to compensation for the injuries sustained; compensation is decided by arbitrators, courts or by the parties themselves.

III. Impact Of Pure No Fault Proposal

1. The No Fault Benefits Are Inadequate

As originally envisioned, no fault systems would provide consumers with full and unlimited compensation of medical expenses and wage losses arising from a motor vehicle accident. In exchange, motorists would sacrifice their common-law right to sue to obtain compensation for human pain and suffering for minor injuries.

However, this proposal would have permitted drivers to purchase a policy with very limited benefits. The basic policy would provide $50,000 in total benefits to cover all of the following:

• medical bills
  

• wage loss beginning up to three weeks after accident, limited to 3 years and 85% of lost wages to maximum of $1000/month; after one year on disability, the injured motorist must take any job she can do, regardless of pre-accident occupation and earnings, and the policy pays the difference between present and pre-accident earnings.
  

• rehabilitation
  

• home care replacement services up to maximum of $1000/month

However, under the proposal, auto insurance companies can reduce the no fault benefits by the amount of benefits received from other sources, such as workers’ compensation, social security, and state or federal disability benefits — potentially reducing the value of the policy substantially.

The policy also provides a maximum of $50,000 in death benefits — for loss of one or both parents — to be split between dependents; if there are no dependents, $25,000 goes to the estate . However, death benefits are reduced by the amount of wage loss or replacement services benefits the victim received.

Under this proposal, insurance companies must sell policies offering coverages of up to $1 million in medical, rehabilitation, wage loss, and replacement services; death benefits of up to $50,000 per surviving dependent (up to $200,000, divided equally between them if more than four); wage loss limited to 3 years and 85% of lost wages at a maximum of $2500/month; replacement services up to a maximum of $2500/month. (Warning: The proponents frequently refer to the $1 million policy as the “standard” policy. A Los Angeles Superior Court ruled the initiative’s title and summary misleading on this point, forcing the proponents to circulate a new petition). Collision and comprehensive coverage must also be offered.

Property damage exception: The proposal retains the present system for the most common form of auto accident: property damage. Motorists must purchase $5,000 in property damage liability insurance to cover damage they cause to others.

Deductibles: Deductibles for the minimum policy can reach $1,000 per person (not applicable to pedestrians and passengers unrelated to the owner).

Wage loss benefits are meager : Compensation for lost wages under the basic policy is limited to $12,000 per year — even if the insurance company has not paid out the balance of the available no fault policy medical benefits (if the injured motorist had purchased health insurance, for example). This is a windfall for the insurer, and arbitrarily denies workers the compensation they would need in cases of serious injuries.

Low benefit levels combined with the prohibition on lawsuits will leave many injured accident victims without adequate compensation. The total no fault benefits provided by the proposal under the minimum policy will be grossly inadequate in cases of serious injury, where $50,000 would only cover a short hospital stay.

Under most no-fault systems, when the no-fault benefits are exhausted, the injured motorist has the right to bring suit against the at-fault motorist to collect the difference. That is why no fault states require motorists to carry supplemental liability insurance for the protection of motorists once the no fault benefits run out. But the “pure” no fault proposal contains no requirement that motorists purchase extra insurance; and it completely bans all lawsuits by innocent motorists against virtually all drivers — a deadly and tragic combination.

2. The Pure No Fault Proposal Eliminates the Right to Full Compensation

As noted above, the theory behind no fault was that it would require motorists to sacrifice their common-law right to receive compensation for human pain and suffering for minor injuries in exchange for unlimited coverage of all losses. However, motorists whose own no fault coverage was insufficient to cover all expenses could still file suit to collect the difference from the driver who caused the accident. And victims of serious and/or permanent injuries could sue for pain and suffering compensation.

The “pure no fault” proposal contains a near- total ban on all litigation. Unlike every other no fault system in the nation, the proposal would prohibit virtually all lawsuits in auto accidents under any circumstances, no matter how serious the injury, how irresponsible the person who caused the crash, how inadequate the victim’s own insurance coverage, or how abusive the insurance company. The only exception to the ban is when the motorist who caused the accident was engaged in criminal conduct at the time, for which he or she is subsequently convicted, or was shipping hazardous materials. This is why the proposal is described as “pure” no fault. Examples:

• If a reckless millionaire driver with millions of dollars in no fault coverage runs a red light and hits a motorist who has purchased the minimum policy ($50,000), badly injuring the innocent victim and his family and causing medical bills and wage loss of over $200,000, the innocent victims still may not sue the wealthy motorist once their own no fault benefits run out, even though he has far greater coverage.
  

• A child whose single parent was killed by a driver speeding 100 miles per hour will receive only $50,000 in death benefits to compensate her for the rest of her lifetime. She can never sue the at fault party. Death benefits are limited to $50,000, no matter how egregious the negligence or consequential the loss.
  

• If an innocent victim’s own insurance company delays payment of bills, refuses to pay the full amount (the practice known as low-balling), or denies payment altogether, the proposal does not permit the innocent victim to sue to force the insurance company to pay.

Pain and Suffering Compensation Unavailable Unless Purchased Separately. No compensation for pain and suffering is allowed motorists and their immediately family, no matter how severe the injury or grievous the circumstances, unless coverage for it is purchased separately by the individual victim to cover her own pain and suffering.¹ The Insurance Commissioner is mandated to establish a “schedule” for payment of “pain and suffering” compensation, under which the “value” of specific injuries like the death of a parent, the loss of ones sexual organs are quantified in a “price list.” Such a schedule is inherently arbitrary: it does not distinguish between the activities and needs of individual victims, for whom the same loss would have very different consequences. (The loss of a limb would affect a professional sports figure far more than an office manager, for example).

This “supplemental” coverage is only for permanent and serious impairment of body function or permanent and serious disfigurement, up to a maximum of $250,000. However, insurers can sell such coverage for any type of injury, if permitted by the insurance commissioner.

“Unbundling” of coverages has always been a money-maker for the insurance industry (for example, insurers have been permitted to separate hurricane, wind, fire and earthquake from traditional homeowners policies and sell them as separate policies). By unbundling pain and suffering into a separate form of compensation for which the injured victim must purchase coverage in advance, policyholders are forced to pay more for coverage they now have.

Unbundling of Pain and Suffering Places Poor, Seniors at a Disadvantage. Those on low incomes, who cannot afford to buy their own pain and suffering coverage, such as senior citizens, would have no ability to obtain such compensation.

Property Treated as More Valuable Than Human Beings. Under the tort liability system, human beings are not treated as chattels. By taking away the right to sue for pain and suffering, the proposal depersonalizes the injured human being to the status of so much damaged goods. Ironically, the only form of legal liability retained by the bill is property damage liability. The proposal retains the requirements for the present system regarding property: motorists will still have to purchase property damage liability insurance to cover damage they do to an innocent motorist’s car or property. However, uninsured motorists cannot sue other motorists who have caused property damage to their vehicle.That motorists are provided greater protection for their property than for their own bodies is one of the more irrational aspects of the bill.

Absolute Ban on Other Forms of Non-Economic Damages. Compensation for human pain and suffering is only one form of “non-economic” damage recognized by American law. The proposal absolutely precludes any compensation for other forms of extreme non-economic damage to a person, such as loss of parental guidance or filial care, disfigurement, loss of limbs, sterilization, inability to engage in sexual activity or to procreate.

Consumers cannot sue their auto insurance company if it refuses to pay a claim. One of the most important powers consumers have presently is the ability to go to court to sue an insurance company that fails to pay a claim. The proposal completely bans such suits. All disputes over claims must be referred to “arbitration,” a non-judicial proceeding in which professional “arbitrators” are hired to make the decision. The proposal does not expressly permit an arbitration decision to be appealed to the courts, indicating that the arbitrator’s decision may be final.

Any disputes over whether an insurance company must pay a medical claim can only be decided by a “Peer Review Organization,” as described below. The proposal suggests — but does not guarantee — that decisions of the PRO can be appealed to a court.

3. “Pure” No Fault Stacks the Deck In the Insurance Companies’ Favor

This no fault proposal would leave the injured person alone, without representation, to face clever insurance adjusters without the leverage of adequate legal remedies.

Insurers gain nearly total control of medical treatment. Currently, injured accident victims go to their health care provider for any necessary treatment. The “pure” no fault proposal mandates radical changes in how accident victims get health care, permitting auto insurance companies to direct patients into “managed care” systems that have come under increasing criticism in recent months.

• Auto insurance companies don’t have to pay medical bills unless “reasonable documentation” is supplied by the policyholder. The insurer decides what “reasonable documentation” is.
  

• Moreover, auto insurers don’t have to pay medical bills if they have referred claims or requests for medical treatment to a Peer Review Organization (PRO). A PRO is an organization that is authorized by the proposal “to determine whether the health-care treatment and services provided to a covered person are medically necessary, medically appropriate and meet professional standards of performance.”

  PROs have a strong financial interest in doing what the insurer wants, because they are hired and paid by the insurer. (Insurers may own PROs, but may not send their policyholders’ bills to their own PRO. The proposal would allow insurers to refer medical bills to other insurers’ PROs. Insurers, whose profits depend on reducing payouts, will make health care decisions that are better left to doctors and medical institutions. Instead of having a doctor decide what is appropriate, reasonable and necessary, the proposal gives auto insurers’ hired contractors the legal right to arbitrarily refuse to pay medical bills.
  

• Injured motorists can also be forced to see the insurance company’s own doctors for an “independent medical examination,” a practice already contained in many insurance policies under which company-paid doctors reject claims routinely.

The proposal also limits the fees doctors may charge when treating auto accident victims to the notoriously inadequate schedule that applies to workers compensation cases. Combined with the insurers’ control over treatment, many family doctors are likely to avoid treating auto accident victims. Medical providers will quickly stop providing treatment when they learn that insurers can delay payment indefinitely.

There is nothing in the proposal that will ensure that consumers can choose or see their own doctors — unless they decide to pay the bills themselves. Indeed, the bill is devoid of any consumer protections to maintain quality care standards, to discourage profit-based decision-making that can have life-and-death consequences or to provide consumers with effective and prompt avenues of redress for such behavior.

Claims handling protections are inadequate. Consumers and regulators in no fault states report problems in forcing insurance companies to pay no fault benefits to their own policyholders. Such problems would be multiplied under this proposal: while it requires “prompt payment of benefits,” the only leverage the proposal provides for payment of claims is interest rates of 10% in the case of health care providers’ previously delayed bills or 24% on benefits that are simply “overdue.” However, as noted above, the measure contains huge loopholes that would allow insurers to avoid paying needed benefits:

The inability of the policyholder to go to court to demand full and prompt payment by an insurance company places the policyholder in a position of great weakness.

4. Pure No Fault Will Lead to Higher Premiums and Higher Profits for Insurers

The proponents of the proposal frequently cite a computer generated estimate by the RAND Corporation that insurance premiums will drop by 45% if voters approve this radical no fault proposal. However, the proposal contains no required rate reduction. It apparently relies entirely on the Proposition 103 rate mechanism to lead to the promised rate reductions. (Click here for a critique of RAND’s studies).

The record suggests, however, that insurers will do everything in their power to avoid reducing rates. The insurance industry has fought for six years to avoid paying the 20% auto and homeowner insurance rollback mandated by California voters in Proposition 103, losing finally in the U.S. Supreme Court in February of 1995. Even after that ruling, State Farm and other major insurers have refused to pay a penny of the rollbacks.

In 1988 in California, insurers acknowledged privately that they would not need to pay rollbacks despite the language in their no fault initiative which mandated a 20% rollback. In Hawaii, insurers reneged on a 1992 rate rollback approved as part of no fault legislation. Indeed, there is ample reason to believe that this no fault proposal will lead to higher rates. Because no fault requires insurers to pay both parties involved in an auto accident — the person who caused the accident as well as the innocent victim — no fault is a more expensive system. No fault plans typically attempt to reduce the cost of the system by imposing arbitrary limits on the amount of compensation for non-economic damages (pain and suffering) that victims can receive. However, these unfair restrictions on victims’ rights do not offset the higher costs of no fault.

Insurers favor from 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 like California, 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. Data compiled from insurance industry records show that no fault systems are consistently the most expensive forms of auto insurance in the nation. According to insurance industry data supplied to the National Association of Insurance Commissioners (NAIC), of the ten states where auto insurance was most expensive in 1993, seven (including D.C.) had no fault systems. Between 1989-93, states with mandatory no fault systems saw their rates increase an average of 40.3% — about one-third higher than the average rate of growth of the average premium in non-no fault states, which saw an average 30.3% increase over the same period.

The fact that the proposal does not condition its no fault provisions — which the insurance industry strongly supports — to motorists’ receipt of any rate reduction means that insurers will get the benefits of the law while consumers will end up paying more for much less.

5. No Fault Contradicts American Notions of Responsibility and Accountability

No fault treats good drivers and bad drivers the same — a departure from American jurisprudence and the fundamental concepts of justice upon which democracy is based. A corollary principle of our country is access to the judicial system — the one branch of government in which a citizen is accorded authority equal to that of any corporation, no matter how powerful — to hold wrongdoers accountable. The no fault proposal both eliminates the concept of individual responsibility and undermines the principle of accountability through a system of law that substitutes for the rule of the jungle.

• By eliminating “fault,” no-fault treats good drivers and bad drivers the same. No-fault thus rewards the bad driver, who, in a tort system, would be ineligible for compensation unless he or she purchased additional first party coverage. Reckless drivers are excused from paying for the harm they cause, and instead, the victims’ insurance companies pay. Careful drivers end up subsidizing negligent drivers.
  

• Evidence suggests no-fault can lead to more accidents. In their 1987 book The Economic Structure of Tort Law, conservative theorists William M. Landes and Richard A. Posner found that tort law leads to lower accident rates because if the incentive to take care is reduced, people will be less careful, and the cumulatively significant result will be more fatal accidents.

This is not to say, however, that insurers will not be able to assign blame as part of their own rating systems. The proposal contains no statutory or regulatory constraints on insurers’ rating practices. Carriers will be free to assert that every policyholder is at fault in an accident, and increase premiums accordingly. Such arbitrary actions fail to apply the appropriate emphasis upon careful driving.

6. No Fault Does Not Significantly Reduce Litigation Costs.

In no fault states like Michigan, suits by motorists against their own insurance companies for failure to pay no fault benefits have skyrocketed. Reflecting this aspect of no fault, an article in the Insurance Counsel Journal, a publication for insurance defense attorneys, concluded: “Whatever the advantages of no fault, a reduction in court cases and court costs would not appear to be one of them.” (July 1986, at page 389).²

Disputes over coverage will clearly arise from this complex and complicated law. Such disputes must go to arbitration, but whether the results of arbitration can be appealed is not stated by the measure.

7. No-Fault Shifts Costs From Private Insurance Companies To Taxpayers.

Under this proposal, accident victims are compensated by their insurance companies according to the limits in the policy they purchased. Most Californians purchase the lowest cost policy available, which under no-fault would be the $50,000 policy. Victims of catastrophic accidents with expenses over $50,000 would have no right to claim compensation from the person who injured them and instead would be forced to first exhaust all their assets and then be forced to rely on taxpayer-funded welfare and health care programs to foot the bill for their remaining medical and rehabilitation expenses and wage loss.

In addition, this proposal requires a victim’s auto insurance benefits to “be reduced by the amount of benefits recovered by such persons from workers’ compensation insurance, state-mandated disability insurance, social security disability insurance, or under any similar federal or state law providing disability benefits…” Instead of meeting the commitment and obligation consumers pay them for, insurers profit by allowing taxpayer funded programs to pay all or part of their obligation.