Image: Businessman talking on his cell phone by a car accident © Stewart Cohen, Blend Images, Getty Images

Between 1971 and 1976, two dozen states adopted what is known as no-fault car insurance.

Under no-fault laws, people injured in car accidents are compensated by their own insurance companies unless damages exceed a set amount. In theory, no-fault laws should reduce the number of lawsuits filed to determine who is at fault in accidents. Fewer lawsuits should help trim car insurance companies' costs, and thus car owners' premiums.

Four decades later, spiraling medical costs and rampant fraud have made the system a persistent target for reform.

In New York, for example, proposed changes to state insurance laws go after "medical mills" that bill as much as $50,000 for treatments that are never delivered. In Michigan, unlimited lifetime medical benefits for accident victims -- underwritten by a $175-per-driver annual fee -- are again under fire in a state where voters have twice rejected attempts to overturn the no-fault law.

"A well-working no-fault system is a good auto insurance option for states," says James Whittle, the assistant general counsel for the American Insurance Association, a trade organization. But he concedes that a well-functioning no-fault system is a challenge to come by. "We find that less and less to be the case."

No-fault insurance has been under the gun particularly in Florida, where fraud is so rampant in some areas that $10,000 worth of personal injury protection can cost thousands of dollars a year. In early May, Gov. Rick Scott signed new measures into law that are intended to reform the system in part by greatly reducing nonemergency treatment.

Life after no-fault

While states grappling with costs try to repair their no-fault laws, states that have repealed them altogether have seen premiums plunge.

Colorado let its no-fault law expire in 2003 because "the governor (Bill Owens) was dissatisfied by it," says Marianne Goodland, a spokeswoman for the Colorado Division of Insurance.

By 2008, premiums had plummeted by 35%, a consultant for the state found. That translated into a savings of $322 per vehicle per year.

Colorado replaced its no-fault law with a more traditional tort system requiring motorists to purchase liability insurance that pays if they injure another person or cause property damage. Motorists must have at least $25,000 of bodily injury liability coverage per person, per accident; $50,000 for all injuries in one accident; and $15,000 worth of property damage liability coverage.

Also, medical payment coverage is automatically added to Colorado policies, although motorists can opt out. This insurance covers the first $5,000 of medical expenses caused by an auto accident. Goodland says motorists tend to opt out of if their health insurance will fill that need.

A report by the nonprofit think tank Rand Corp. found that in Georgia, which repealed its no-fault law in 1991, liability premiums almost immediately dropped 20% and remained steady. In Connecticut, which repealed no-fault in 1994, the drop was more precipitous, with liability rates tumbling about 31% by 2004. (A fourth state, Nevada, repealed its law in 1980.)

The report found that in 2007, costs associated with medical care in no-fault states were more than 40% higher than in states with tort systems.

Checks and imbalances

Of course, that financial penalty isn't spread evenly.

A dozen states -- Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah -- and Puerto Rico currently have no-fault systems. (Eight other states have no-fault personal injury coverage as an add-on, supplementing whatever damages an injured person receives via a tort system.)

However, not all states with no-fault systems have higher insurance rates. Rates in no-fault states such as North Dakota and Minnesota are consistently lower than average. On the other hand, Floridians pay an extra $1 billion per year due to fraud-inflated premiums for personal injury protection, a December 2011 report by the state's Office of the Insurance Consumer Advocate found.

Rates also can vary by city. For example, in Florida premiums are many times higher in some cities than in others.

Under the old law, there were "few or any checks and balances. As a result, good and bad actors profit from the system," Whittle says.

Here's what reform looks like under the changes to Florida law:

  • An accident victim must receive treatment for injuries within 14 days, and the care must come in an ambulance or hospital, or from a physician, osteopathic physician, chiropractic physician or dentist.
  • The $10,000 medical benefit is paid only if a physician, osteopathic physician, dentist, supervised physician's assistant or advanced registered nurse practitioner determines there is an "emergency medical condition." If it's not an emergency, the medical benefit is limited to $2,500.
  • A person must receive follow-up care if referred by a physician, osteopath, chiropractor or dentist, and there's no reimbursement for massage therapy or acupuncture.

While it's possible an injury might become apparent more than two weeks after a wreck, most motorists should be covered by health insurance, Medicaid or Medicare, says Michael Carlson, a spokesman for the trade group Personal Insurance Federation of Florida.

While it's too early to tell what the ultimate financial impact of reform will mean for Floridians, Carlson says consumers "shouldn't be paying these outrageous PIP (personal injury protection) premiums." But the state is already cautioning consumers not to expect too much.

"This projected savings may actually mitigate premium increases, not reduce premiums," the state's Office of Insurance Regulation warned in August.

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