By Chris Frechette, vice president, liability practice
The promise of savings and disenchantment with the time and cost of litigating automobile claims in the courts gave rise to “personal injury protection” (PIP) and a “no-fault” approach to auto insurance in the 1970s.
Under this system, the injured party receives benefits from their own insurer, regardless of fault, and an at-fault driver can only be sued under certain exceptional circumstances. As hoped, early assessments of state-specific PIP programs showed that disparities in compensation became more balanced, claim payments were issued faster, and avoiding the expensive legal process yielded cost savings.
But by the mid-1980s, no-fault states had generally higher costs and, consequently, higher insurance premiums than states that had not adopted no-fault — results that countered the selling point of cost savings. Popular support declined, and some insurers even exited the market. What once glittered had lost its luster.
In the years since, various societal and market changes have driven an overall rise in auto insurance costs. Premium disparities across U.S. states remain, but PIP states no longer dominate the side of the spectrum with the highest premiums; they now fall more evenly among the rest — due in large part to lessons learned and refinements made by those that chose to stick with it.
Is the PIP scale tipping back in the other direction? What might the future hold for no-fault auto insurance? The current-day tale of two contrasting state programs offers a glimpse at what may lie ahead in this ever-changing arena of liability claims.
Michigan
In 2019, Michigan had the highest auto insurance premiums in the country. It remained the only no-fault state providing medical benefits with no limits and, with no pricing controls, had some of the nation’s highest costs. The state legislature passed comprehensive bipartisan reforms, known as Public Acts 21 and 22. Primary changes aimed at cost reduction included choice of coverage levels for PIP (with minimums), mandatory rate reductions required of carriers and a medical fee schedule reducing provider fees by as much as 45%.
The acts created nearly $3 billion in funds that were returned to over 7 million policyholders. Proponents assert that the reforms have allowed residents to choose policies that better fit their individual needs, driving habits and budgets; reduced overinflated medical costs; and curtailed fraud. Auto premiums dropped 18% from 2019 to 2020 — the largest reduction in the U.S. that year — taking Michigan out of the No. 1 spot.
Florida
Although the number of drivers and number of automobile accidents in the state of Florida stayed relatively constant, the frequency and cost of PIP claims have grown exponentially in recent years. Despite passing 2012 legislation aimed at reducing fraud and lowering costs (PIP accounted for only 2% of all insurance premium in the state, yet generated almost half of all fraud referrals), fraud is still prevalent. Florida carries the highest auto insurance premiums in the nation, despite being one of the only states not to require bodily injury (BI) insurance.
SB54 was introduced last year to end PIP and replace it with mandatory BI coverage. The bill was vetoed by Gov. Ron DeSantis, citing concerns over unintended consequences. Proponents argued the measure would have lowered premiums, while opponents contended exactly the opposite. Florida continues to maintain the highest rates of fraud, litigation and lawsuit abuse in the nation — bolstered by third-party bad faith suits and lack of conventional limitations of legal fees.
Analysis
Examining the tale of Michigan and Florida reaffirms that PIP, like any other coverage, exists within a system with disparate and changing influences. Accordingly, it is neither hero nor villain on its own; it’s simply one component of a larger structure — one that can, on its own, be executed poorly or executed well.
- Michigan’s reforms appear to have reduced abuse and expanded choices, resulting in cost reductions. Work remains in other areas of the system driving premium, including reducing the number of uninsured drivers and examining rating factors. While a true cap was not established, the costs and benefits of Michigan’s PIP component have improved.
- In Florida, the latest decision reflects that it may not be an all-or-nothing choice between PIP and BI coverage(s). Insurance premiums in Florida are influenced by weather exposures, traffic congestion from visiting drivers, unusually high numbers of younger and older drivers, a high percentage of uninsured drivers and the highest litigation and fraud rates in the country.
In context, PIP can be part of a state’s overall automobile insurance system without single-handedly skewing premiums. Equally clear is that market factors have changed and continue to change. When PIP was first introduced, it briefly succeeded in reducing litigation rates, but in time, the variances diminished. Early in the history of PIP states, medical costs remained aligned with claims in tort states, but by 2000, medical costs under PIP had more than doubled by comparison — contributing to some states choosing to drop and others to reform PIP. Reforming states borrowed lessons from workers’ compensation medical fee management and added other mechanisms that have brought about more controls against abuse, greater predictability and reductions to premiums.
Today’s broader societal and market environment continues to be influenced by increasing medical costs, growing litigation rates and bigger jury awards as a result of social inflation and other factors. Leveraging data and reflecting on the history and lessons learned in auto no-fault, the timing may be ripe for another re-evaluation. By integrating limits and removing incentives for fraud and other abuse, short of broader tort reform, reformed PIP may once again present a tool worth considering but for new reasons.
The cost of litigation has changed. Redefining table stakes for what is litigable with the proper controls for managing medical expense may provide enhanced value while reducing costs if it’s part of a fully considered and well-integrated program structure.
> Learn more — read our commentary paper by Chris Frechette for a more thorough analysis of the history of no-fault auto insurance and PIP’s prospects for the future