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Whose No-Fault is It, Anyway?

InAmerica, 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 getin 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 bythose 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 youcan acquire great wealth just by getting you Ford bashed up.

But closer inspection shows this system containsmore 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 wassomebody 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 willthen pocket 30 to 40 percent of the money the court awardsyou. 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 isyou. so up go your premiums.

This system of suits, known as the tort liability system, also means you have to wait--thoselawyers with all those suits create gridlock in the civil courts: more than 80,000 auto cases clog the California superior courtsystem 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 turningon 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 throughall 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 ,000 in medical expenses, and you can't bide your time for three yearsbefore collecting, so you settle out of court for half of what you're entitled to in order to avoidcomplete 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 chanceat "pain and suffering" bonus that has nothing to dowith emotional trauma or inconvenience, but is a standard three- or four-times multiple of out-of-pocket costs. A shot at such generosity also createspowerful 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 docry 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 forjustice because the courts are busy listening to Smith's and Jone's lawyers bending the truth about who causedthat 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 worsesystem if you tried," says insurance expert Andrew Tobias. Thanksto 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, juryawards for such notoriously unprovable injuries as whiplash and knee pain climbed 42 percent in a single year. Asa 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 recordsnow pays ,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 politicalissue; 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 publicationof Robert Keeton and Jeffrey O' Connell's Basic Protection for the Traffic Victim in 1965. No-fault is cheaper, quicker, andfairer.

No-fault treats auto insurance like any other kind of insurance: If you get injured,you get paid. Period. It's cheaper because it eliminates the lawyers and the incentive for "pain and suffering" fraud. It's quicker because it eliminates the court delays. It's fairer because you get paid for what you injuries actuallycost you--your out-of-pocket medical expenses, rehabilitation costs, and lost wages. True, you can't look forward to that pain and suffering jackpot--the kindthat inspires bumper stickers--but then again Blue Cross doesn't compensate you for pain-and-suffering either. There's also a common-sense appeal to no fault: Since most accidents are just that--accidents--in which both drivers share some blame, what's thepoint in having a battery of lawyers concocting clever arguments about whose guilt is greatest?

The virtues of no-fault insurance have been borne out by experience. After Michigan switched tono-fault in 1973, AAA Insurance cut the amount it paid lawyers from 32 percent of itspremium revenues down to only 4 percent; at the same time, it increased the amount paid to claimants from 48 percent to 73 percent. After NewYork instituted no-fault, its auto-injury court filings dropped 80 percent. In Michigan, the average insurance premium is 17 percent less than it would be without no-fault, according to a 1985 study bythe Transportation Department. In New York it is 6 percent less; in 21 percent less. Furthermore, a recent study done by former White House Conusumer Affairs Adviser Virginia Knauer estimates that no-fault would save consumers.7 billion a year. As the California Insurance Commissioner put it, consumers are "not going to get lower auto insurance rates" without reforms like no-fault.

Withthe case for no-fault insurance being plain for anyone to see, an obvious question arises: Why has no-fault insurance--real no-fault insurance, thatis--been instituted in only three states? And why does no-fault now seem such a discredited concept?

There are two guilty parties. The first is the trial lawyers. They're the ones who get rich dragging car wrecks through the courts, and, as it happens, they also have inordinate influence in the state legislatures, where insurance laws get written. (A 1945act of Congress forbids the federal government from regulating the insurance industry.) The triallawyers have consistently used that influence to block true auto insurance reform.

While this may come as no surprise--fewof us have any illusions about the effects of lawyer-lobbyists on the public good--the second part of the answer is a surprise indeed: Ralph Nader. That's right, Mr. Consumer Advocate himself has consistently teamed up with the trial lawyers toblock one of the most important consumer reforms in the country. While the trial lawyers are driven by plain old greed, Nader at least is driven by principle--his inordinate belief in the virtuesof the lawsuit. But the effect of both on the average consumer isthe same: He gets screwed.

Thanks to trial lawyers and Nader, there is a great deal of confusion surrounding no-fault insurance.While, in fact, it is an ideal reform that's seldom been tried, most people think it's been tried quite often and found to be a failure. That's because 21 states have concocted watered down no-fault systems--fake no-fault--that in some cases is worse than the tort system it replaces.