‘No-Fault’ Insurance Policy is Flawed, Says Recent Study


No-fault auto insurance has failed to accomplish its primary goals to lower premiums and limit court expenditures, according to a recent study by the RAND Corporation, a nonprofit research organization.

car-crashThe insurance scheme has notably declined in terms of popularity for both customers and insurers.

The study said that the scheme has, in effect, caused court costs to increase because the cost of medical claims has risen sharply. Initially, it intended to keep compensation costs low for persons involved in road mishaps by taking most of the cases ‘out of the court system.’

RAND researcher and lead author of the study James M. Anderson said that the no-fault insurance scheme is a ‘classic example’ which displays the ‘law of unintended consequences.’

The study aimed to provide a comprehensive overview of the nation’s venture into no-fault systems. Here, drivers are enabled to seek compensation from their own auto insurer rather than from the other driver involved in the road mishap.

Since its inception in the 1970s, the authors of no-fault insurance believed that it was a ‘superior innovation’ with the potential to provide fair leverage for policyholders. Almost four decades since then, much of its luster has faded.

The report cited 29 states with ‘tort-based’ policies which permit car owners to select between ‘full tort’ insurance (more expensive) and ‘limited tort’ insurance (less expensive). The remaining 21 states adopt their own variation of no-fault insurance.

The no-fault scheme has three key components: (1) a driver is restricted from filing a lawsuit against the other driver for causing the accident, (2) payment cannot be received for ‘pain, suffering or other non-economic damages’; and (3) all drivers are required to carry insurance so that each party may be able to take care of his or her expenses (inclusive of medical expenditures) from their respective insurers.

Lawmakers thought that the scheme would deter administrations costs and court litigations, enable fair compensation for victims and pave the way for a more affordable alternative. In actuality, the reduction of premium costs never happened. The study cites ‘increased medical costs’ as the primary culprit.

In 2004, injury costs were 73% more costly under no-fault schemes. Back in 1987, it was only 12% more expensive. Moreover, drivers still had higher claim costs in states that ‘restricted’ lawsuits in comparison to states that allowed lawsuits to be filed.

Anderson attributes increased medical costs to consumers who avail of more ‘specialized types’ of medical treatment. Also, these costs (which are also driven by greater cost inflation) are most likely covered by the auto insurer rather than by medical insurance providers, especially in ‘no-fault states.’