No Fault Failure

On Monday, the RAND Corporation released a comprehensive overview of the no-fault insurance system and documented how the one-time darling of insurance systems has fallen so far out of favor, simply because it failed to do what it set out to accomplish: higher availability of insurance with lower premium costs. The study, “The U.S. Experience with No-Fault Automobile Insurance: A Retrospective,” can be read in full at the RAND website.

The idea behind a no fault insurance scheme is that if you are in a car accident with another motorist, both of your insurance companies will pay out to their policy holders, regardless of who was at fault for the accident. The hope was that this would allow people immediate access to their insurance dollars without the months or years of costly legal wrangling that occurs in tort-based insurance states. No fault, however, limits an insurers ability to determine who was at fault, recoup loses from the guilty party, and makes determining the risk of individual policy holders very difficult (even if an insurer can approximate the likelihood of his insured causing an accident how are they supposed to gauge the riskiness of all the other drivers on the road that they’ll end up paying for?).

In the 1970s, many policymakers and analysts believed that no-fault automobile insurance was a superior innovation that would displace conventional, tort-based automobile insurance policies. Today, however, no-fault has lost much of its popularity among insurers and consumer groups, according to the report…

Policymakers believed no-fault insurance would minimize litigation and administrative costs, more fairly compensate victims of automobile accidents and be less expensive than tort-based insurance. In practice, however, premium cost reductions never materialized, in large part because of increased medical costs.

Injury costs under no-fault were only 12 percent higher in 1987 relative to tort-based insurance, but by 2004 costs were 73 percent more expensive under no-fault plans. In addition, those states that restricted lawsuits against other drivers actually had higher claim costs than states that permitted lawsuits.

Anderson said he and his colleagues believe medical costs increased largely because consumers who have no fault policies tend to use more specialized types of medical treatment and because medical costs may be more likely to be covered by auto insurance rather than medical insurance in no-fault states. There also is evidence of greater medical cost inflation in no-fault states.

While the study does call for more research before concluding why medical costs seem to have skyrocketed under the no-fault system, it is clear that forcing insurance companies and consumers into a one-size fits all policy that forces certain coverage and prevents legal recourse has not resulted in cost savings, but rather in unintended consequences.

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