No-Fault Auto Insurance


PETER KINZLER, a former congressional staffer, was the president of the Coalition for Auto-Insurance Reform. A more detailed analysis of the battle over no-fault can be found in Kinzler’s book Highway Robbery: The Two-Decade Battle to Reform America’s Automobile Insurance System.

Published January 23, 2024


Attempts to mandate no-fault auto insurance nationwide died a slow death around the turn of the last century, the victim of unrealistic expectations by its proponents and, more importantly, well-organized opposition by those who stood to lose from its adoption: trial lawyers, some insurance companies and, surprisingly, consumer advocate Ralph Nader. Are conditions finally ripe for another run at the consumer reform movement’s holy grail, sweeping changes to simplify auto insurance, ensure that the injured are compensated and reduce its cost dramatically?

This is hardly a new cause. The push for federal nofault legislation was the byproduct of Senate hearings in the late 1960s that focused on the high cost of auto insurance. Similarly, the revival of no-fault legislation in the 1990s was born out of the promise of billions in savings for drivers. If past is prologue, then recent fierce jumps in auto insurance premiums offer another window to overhaul a system that really works to no one’s advantage save trial lawyers.

The latest data show auto insurance premiums rising at an annual rate of 19 percent, and there is no good reason to expect the increases to tail off anytime soon.

Skyrocketing rates are probably a necessary, but not sufficient, condition for attaining reconsideration of nationwide no-fault legislation. After two failures to bulldoze legislation past the determined opposition from trial lawyers and the malign indifference of insurers, there must be good reasons to believe it will meet a different fate this time. So an analysis of the scandalous deficiencies of fault-based insurance and the potential benefits of no-fault, combined with a hard look at what went wrong in the two previous efforts, are preconditions for reviving a crusade to get the job done.

Where the Saga Began

From the first auto crash in 1895 (when there were only four cars in the United States and two of them collided in St. Louis) until the 1970s, all state liability laws provided that an injured person could recover damages only by proving the other driver was at fault. Then and only then would one driver’s auto insurance pay for the injured person’s losses. Indeed, regardless of how much insurance the injured party happened to have, they were at the mercy of how much coverage the at-fault driver had purchased.

At first glance, this seems both simple and fair. Now take a second look. There were too many ways that you as an “innocent” injured person could not recover damages – in single car accidents where there was no other driver at fault (if, for example, you skidded off an icy road into a tree), where you were injured by a hit-and-run driver or an uninsured motorist, or where you were partially at fault. Even if you could identify the at-fault driver and were free of fault yourself, your recovery was limited by the amount of insurance the other driver chose to carry. If their insurance was insufficient to cover the full loss and they did not have deep pockets, the balance of the burden was on you. To add insult to injury, you had to fork over one-third of whatever you recovered to your lawyer as a contingent fee, regardless of how much (or little) work they did.

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Not surprisingly, only about half of all persons injured in car accidents recovered anything. Of those who could manage to hold someone liable, the most seriously injured got the least as a proportion of their actual losses – on average about 30 percent of their medical bills and lost wages. Moreover, it took way too long (16 months on average) to see a penny. And here’s the miserable kicker: about twice as much of your insurance premium dollar went for lawyers’ fees as for victims’ medical bills and lost wages.

Over the years, the states’ liability rules were adapted to make recovery easier. Think “comparative negligence,” where reforms gave you a chance to recover something if you were only partially at fault. Also, insurers offered coverage to pay for your injuries if the guilty party got off scot-free. But, of course, there was no free lunch there. If you wanted that coverage, you paid extra for it.

Here’s a non-surprise: the system that compensated only a fraction of those injured was even worse for poor people. They recovered a lower percentage of their losses – and paid more for their insurance. To the latter point, a 1993 study in Maricopa County, in Arizona, found that low-income drivers paid nearly one-third of their income for auto insurance.

the dawn of no-fault

In 1965, law school professors Robert Keeton and Jeffrey O’Connell offered a clever way to dig ourselves out, calling for dropping the liability approach for one modeled on health insurance, where injured people recover in almost all cases from their own insurers regardless of who did what to whom. It promised to remedy the main defects of the liability system by replacing it with prompt compensation for the level of loss you, not the other driver, chose to insure against. No more hungry lawyers working on contingency and endless cases in which some injured folks ended up with much too much and others got much too little. Daniel Patrick Moynihan, one of the great political thinkers of his time, called the idea “the one incontestably successful reform [proposed in] … the 1960s.”

The idea of no-fault was so appealing on its face that it initially spread like wildfire. The first no-fault auto insurance law was adopted in Massachusetts in 1970, and by the mid- 1970s, 16 states had created no-fault systems. The U.S. Senate, spurred on by a 26-volume report from the Department of Transportation that dotted the i’s and crossed the t’s of the Keeton-O’Connell findings, waded into the fray. Shrewdly advanced by the powerful Democratic chairman of the Commerce Committee and with outside support from labor unions, consumer groups and the AARP, the Senate passed a bill in 1974 that would effectively have required all states to adopt a standardized system paying unlimited no-fault compensation for medical losses. Had not the impeachment of President Nixon brought all legislation to a halt, federal no-fault legislation might have become law in 1974.

The drafters of the federal bill (including me) continued to focus primarily on the issue of compensation of serious injuries, including retaining a threshold for lawsuits in very serious injury cases.

Still, the tide seemed to be going out on the auto liability system-as-usual. But once again, appearances were misleading. Dogged opposition by lawyers who stood to lose billions of dollars in fees coupled with some wellintentioned mistakes by supporters and just plain bad luck combined to stop both the states and Congress from completing the job.

What Went Wrong

By now, you have probably wondered how I am qualified to tell this story. I had a front row seat to both efforts to pass federal nofault – first, as the key House staffer in the 1970s fight and, then, as the head of a privatesector coalition in the 1990s and 2000s. To begin at the beginning, I took up the cause in 1975 as a newly minted counsel for the House subcommittee considering the shortcomings of auto insurance. I thought it would probably take just one full Congress – two years – to finish the job. As you can see, I was a little off in my timetable.

What I failed to appreciate were the mistakes that supporters of freshly minted reforms almost inevitably make and, more importantly, the lengths to which the opponents would go to protect their livelihoods. The proponents of no-fault (me included) made two well-intentioned but critical mistakes. The first was to require payment of nofault benefits for all “reasonable and necessary” medical losses, with none of the traditional cost controls of health insurance – not even deductibles and co-payments. The absence of such controls proved most problematic in Michigan, where the no-fault law required payment for unlimited medical and rehabilitation benefit, and too many victims of accidents got greedy.

The second and far more costly mistake was to include a “threshold” of severity (either a fixed dollar amount of loss or a “verbal” threshold such as “serious and permanent injury”) that permitted an injured person to also sue for “pain and suffering.” It was an admirable concept, but it made the good the enemy of the best. No-fault benefits alone, with no provision at all for recovering for pain and suffering, would have provided better and more reliable compensation than was available with the right to sue in states with old-style liability laws. Predictably, thresholds opened the door to abuse – and the trial bar was there to take advantage.

The lawyers sabotaged the tight thresholds proposed for legislation in state after state, making it much easier to sue. They also encouraged unnecessary and even fraudulent no-fault claims to reach the thresholds. As a result, in New York and New Jersey (to take two examples) the cost for the portion of the premium to cover pain and suffering suits has always been about the same as the cost for the no-fault portion. So, in effect, motorists were supporting two systems instead of just the no-fault system. Then, like the child who murders both parents and pleads for mercy on the grounds of being an orphan, the trial bar went to Congress and argued against a federal mandate for no-fault on the grounds that the state no-fault laws cost too much.

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And they came with full pockets. After the 1974 loss in the Senate, the trial bar moved its headquarters from Boston to Washington, DC, hired the best-placed lobbyists in town and made generous contributions to members’ campaigns from the largest single-issue political action committee fund in town (back then, anyway). Their lobbying had the most impact on their longtime allies in the Democratic Party, while the insurers who decided to oppose no-fault worked on their longtime allies, Republicans.

Still, the drafters of the federal bill (including me) didn’t understand we were now playing catch-up. We continued to focus primarily on the issue of compensation of serious injuries, including retaining a threshold for lawsuits in very serious injury cases. Even though it was higher than any threshold set in existing no-fault states, its inclusion eliminated any possibility of significant reduction in premiums – the selling point on which nofault advocates had built public support in the first place.

The rest is history. Without the promise of substantially lower premiums, it was impossible to mobilize the public to overcome the well-financed special interest opposition. Nevertheless, the bill did remain under active consideration until late 1978, when the House Commerce Committee narrowly rejected a final push.

When at First You Don’t Succeed…

The year 1978 seemed like the end for nofault. Over the next 19 years, no member of Congress introduced a new version and all the advocates among congressional staff and in the private sector went on to other projects. Except for two: Jeffrey O’Connell, the co-father of the concept, and Bob Joost, a former Senate staffer. They focused on identifying a clever way to have it both ways – to give each motorist a choice between either the fault system already in place in their state or a federal no-fault alternative. The key to this two-option approach was finding a way to equitably address accidents between drivers who had chosen different systems. O’Connell and Joost called their solution “connector” coverage. Here’s how it worked.

Fault-system drivers would purchase an additional coverage that operated the same way as their uninsured motorist coverage option on their old policies. Under it, if they had an accident involving a driver with no-fault coverage, they could recover damages if they could prove the no-fault driver was at fault. As with uninsured motorist coverage, the injured person would recover from their own insurer through the new connector coverage. The no-fault driver would also get what they bargained for – compensation regardless of fault from their own insurer, with the right to sue the at-fault driver only for economic losses not covered by their own no-fault policy.

Importantly, under this approach each driver would wind up paying the same premium as they would have paid had the system they chose been the only one in place. The calculations backing up this conclusion are complicated. But you needn’t take my word that they delivered on their promise; the RAND Institute for Civil Justice (an organization, incidentally, supported by insurers, trial lawyers and consumer groups) did the math.

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While they were at it, O’Connell and Joost offered fixes for the weak links in most nofault laws – the loopholes still allowing way too many lawsuits and the high cost of providing generous no-fault benefits. First, their “Auto Choice” approach called for drivers to choose only as much in the way of no-fault benefits as they wished to buy (subject to a required minimum amount), thereby enabling motorists to balance coverage with affordability. Second, the new Auto Choice no-fault coverage permitted lawsuits only for excess economic loss – eliminating the pain and suffering lawsuits that had made state no-fault laws so costly.

By fixing the issues with the previous federal no-fault bill and the state laws, Auto Choice was able to promise huge savings for those who chose the no-fault option – in the tens of billions of dollars in the aggregate annually, as estimated by the non-partisan Joint Economic Committee of Congress.

New Jersey and Pennsylvania adopted versions of Auto Choice. However, their no-fault options were seriously flawed by their failure to limit lawsuits to economic loss only. Instead, the choice is between a full liability system and a no-fault option with suits for serious injuries only. (In trial lawyer parlance, cha-ching, cha-ching.)

A far greater threat to the trial lawyer franchise arose in 1996 when Senator Mitch McConnell from Kentucky introduced the first federal Auto Choice bill. Support for the new approach mushroomed. Ten of the largest newspapers in the country endorsed it (that meant a great deal at a time when widespread internet usage was just beginning), and McConnell was able to secure support from Arizona Senator John McCain, the Republican chair of the committee with jurisdiction, and Democratic Senate heavyweights Daniel Patrick Moynihan from New York and Joseph Lieberman from Connecticut. With outside support from Michael Dukakis, the bill enjoyed support from three former or future party nominees for president or vice president.

Crash and Burn Redux

With key Republicans onboard, conservative members and outside interest groups lined up in favor. I expected that. What I didn’t expect was for consumer groups – who had been the bulwark of outside support for the 1970s legislation – to oppose a bill that would have achieved almost everything they had valued in no-fault, and then some. The explanation: the trial bar made them offers they couldn’t refuse.

Fifty years of experience with 12 state no-fault laws shows that the no-fault portion provides better, more certain and more timely recovery of economic losses to all injured persons than the fault system.

As important, if not more important in changing the position of the consumer groups was the active opposition of the godfather of consumerism, Ralph Nader. He was immensely influential in changing the views of the consumer groups, or at least giving them cover to take the path of least resistance. I came to the conclusion that Nader’s opposition was primarily grounded in his close relationship with the trial bar, which had loyally supported Nader’s worthy efforts to improve auto safety. The trial bar both lobbied the National Highway Traffic Safety Administration for tougher safety standards and sued auto manufacturers over defective vehicles.

The combination of trial bar and consumer group opposition proved too much. Despite several high-profile hearings, no committee advanced a bill. Then, as with the earlier nofault effort, a major outside event slammed the door shut. This time it was the terrorist attacks of 9/11 that left only one issue on the table in Washington. No no-fault bill has been introduced since October 2004.

Why Try Again?

Let’s first examine circumstances that favor a new effort. Start with the reality that the more things change, the more they remain the same. Today 38 states only permit the sale of fault and liability insurance that leaves huge compensation gaps for injured motorists – and still ends up delivering more cash in the form of contingency fees to lawyers than it does to accident victims to cover medical bills and lost wages.

Fifty years of experience with 12 state nofault laws shows that the no-fault portion provides better, more certain and more timely recovery of economic losses to all injured persons than the fault system. No tweaks to the latter can ever provide those advantages. The states’ experience with no-fault also demonstrates that thresholds for lawsuits serve more as a target for abuse than as a means of providing better compensation, driving up costs for all motorists.

Some changes in circumstances also offer hope that another run at the clever Auto Choice hybrid would manage to cross the finish line. Start with the fact that far more people have health insurance coverage today than did in the 1970s or even the early 2000s. Thus, much of the coverage for auto accidents duplicates health coverage, creating the potential for significant savings by coordinating the two. This offers an opportunity to save money for cash-strapped policyholders (as well as the federal government, which pays the medical bills of indigent accident victims and older people on Medicare when the fault system does not) without harming anyone except trial lawyers and crooks.

New Jersey and Pennsylvania, both of which adopted variations on Auto Choice, offer a different experience. They demonstrate that the no-fault option of a choice system can offer significantly lower premiums while providing better compensation for injuries than either the fault system alone or a dual no-fault/fault system. It’s also worth repeating that rates for auto insurance in the past two years have outrun the general rate of inflation, again drawing attention to the opportunity no-fault presents to put money into people’s pockets.

What about the politics? The insurance industry, unlike the trial lawyers, has never spoken with a single voice on no-fault – which is understandable. On the one hand, reforms that simplify the product of insurance make it more difficult for individual companies to profit through marketing real and imagined differences. So an Auto Choice regime would make insurance more transparent and more competitive, wringing out some of the potential for profit. On the other hand, auto insurers are plainly battling economic trends beyond their control that have driven up their costs. One would expect that the inflationary environment would soften industry opposition to measures that, among other things, would reduce the payday of lawyers in insurance settlements.

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Then there is the influence of Ralph Nader. That influence is waning, in part because he is now 89 years old, and in part because many liberals blame his run for president in 2000 for the loss of Al Gore and all that followed in the Bush administration. He as much as admitted this reality in his book, Return to Sender: Unanswered Letters to the President, 2001-2015. This reality should put consumer groups in play again.

That brings me back to the trial bar. They remain a significant supporter of Democrats, but their influence on the multimillion-dollar campaigns of today is far less than it was when $50,000 to $100,000 paid for soup to nuts in political campaigns. Moreover, automobile cases mean far less to trial lawyers in an era of class-action litigation. Bottom line: While hardly anemic, the 800-pound gorilla has been slimmed down to 300 or 400.

In any event, there are now ways to counter the influence of trial bar money on members of Congress. One need look no further than the success of crowdfunding for many different causes – and in particular, at the $270 million that Democratic presidential candidates and organizations raised during the 2019 primary season from 5 million donors.

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Readers may be forgiven for wondering whether any contemplated change in government regulation that undermines states’ rights and is opposed by a still-formidable lobby can take place in bitterly partisan Washington. After all, the support for Auto Choice two decades ago was led by Mitch McConnell, and it still lost.

Maybe that skepticism is valid. But one must also wonder whether both political parties don’t feel some pressure for bipartisan action – especially action that costs the government nothing and may save money for Medicaid and Medicare, which are often left as payers of last resort. And what sounds better than the promise of significantly lower insurance premiums and far more reliable compensation for injuries? The original warriors like me are old and gray, but the fight continues.

main topic: Finance: Insurance