When the District of Columbia transformed its traditional automobile liability insurance system into a no-fault plan nearly 18 months ago, insurance companies predicted that accident victims would be better compensated.
Trial lawyers, who liked the old, more litigious system, predicted a disaster.
Although the evidence is still tentative, early results suggest that insurers were right. The new system appears to be working as they promised.
J. Robert Hunter, head of the National Insurance Consumer Organization, said insurance companies seem to be paying medical and other claims promptly and that rate increases have, on the average, been small.
D.C. Insurance Commissioner Marguerite Stokes said the department has received few complaints that would indicate motorists or pedestrians are having major difficulties collecting money from their insurance companies when they are involved in accidents. Hunter said his group reports the same low level of complaints.
Opponents of no-fault suggest, however, that the statistics may be slightly misleading. Donald Chaikin, a leading personal injury attorney, said a number of victims are not being recompensed fully for their medical bills but have not complained to the insurance department because they don't think it will help.
"The insurance industry is taking advantage of claimants," Chaikin insists.
Commissioner Stokes said she has "no reason to believe that there are a number of claims that are not being paid," based on complaints made to her office.
No-fault insurance became law in the District of Columbia on Oct. 1, 1983, after long debate, much of it behind the scenes.
Trial lawyers, who make their living from personal injury cases, had argued that no-fault insurance -- under which injured parties are reimbursed for medical expenses by their own insurance companies, no matter who caused the accident -- was unfair because it restricts an individual's right to sue.
Insurance companies argued that no-fault was better because it guaranteed that everyone injured in an accident was recompensed, even in cases where a driver injured himself and has no one to sue.
Insurers said they could make money under either the old or new system, but that under no-fault, more of the $100 million District residents pay each year for auto insurance would go to victims and less to legal costs.
The debate reflects that, at the heart, no-fault insurance is a tradeoff: An individual's right to sue a negligent driver for "pain and suffering" is limited, but injured parties are promptly paid by their own insurer for medical expenses and lost wages, no matter who was at fault in the accident.
August P. Aleggi, vice president of Government Employees Insurance Co., the biggest auto insurer in Washington, said the new system is working as the insurance companies and the City Council expected. Liability claims have declined, and the money the companies save -- in payouts, court costs and legal fees -- is being paid to cover no-fault medical expenses and salary losses of accident victims.
Trial lawyers have continued their argument that because no-fault restricts victims' access to the courts, it is an abridgement of fundamental rights.
A federal judge agreed with the lawyers in a ruling last year. Even though he stayed enforcement of his ruling until a higher court can rule on the city's appeal, the order has created a high level of uncertainty about the future of the city's infant no-fault program.
Grover Czech, regional vice president of the American Insurance Association, said that in other states that have adopted no-fault laws, lower courts have found the laws defective. But in every case but Illinois, which had to rewrite its statute, the laws have been upheld by higher courts.
U.S. District Judge Oliver Gasch late last year declared unconstitutional a key provision of the District law that sharply restricts a victim's right to sue the party who caused the accident. An injured party must incur medical bills in excess of $5,000 or suffer a disabling or disfiguring injury before he or she can sue. Gasch agreed with a plaintiff who incurred several thousand dollars of medical bills that the $5,000 ceiling was arbitrary. While he threw out the so-called threshold at which suits can be filed, he upheld the rest of the no-fault law that requires insurance companies to pay their customers' medical bills of up to $100,000 and replace lost wages of up to $24,000.
Gasch also upheld another controversial part of the law -- unrelated to no-fault -- requiring all District car owners to carry insurance on their vehicles.
Insurance company officials said that if the appeals court upholds the Gasch ruling, the cost of providing automobile insurance in Washington could become prohibitive.
A no-fault insurance system containing no meaningful restrictions on liability suits would sharply increase the insurance companies' outlays, according to the firms. Not only would they have to pay the personal injury claims of their own customers (no-fault is formally called personal injury protection), but they would still be saddled with the large number of pain-and-suffering claims common to the traditional liability system.
As a result, premiums would rise sharply, unless the District returned to what insurance executives say is the inferior system of pure liability.
Studies by the federal government and others have shown that under the traditional liability system, those who receive minor injuries in auto accidents are overcompensated -- usually because insurance companies will settle for a small amount for pain-and-suffering to avoid going to trial -- while those seriously injured are undercompensated.
Juries often decide that the seriously injured person was partly or totally at fault and thus award only a portion of the costs. Lawyers fees usually eat up about a third of the award. Furthermore, even fully compensated victims often have to wait months or years before the courts decide their claims.
Attorney Chaikin said that most Americans have health insurance and that most accident-related claims are paid by health insurance anyway. "No-fault is medical coverage. If you have a good health insurance policy, you don't need no-fault," he said.
But Stokes said no-fault is far more than health insurance: "You go to your own automobile insurance company to collect if you are injured, lose work or die."
No-fault also provides up to $2,000 in burial benefits, and the medical payments provide for rehabilitation, as few health insurance policies do.
Herman Brandau, of State Farm Insurance, said that since no-fault became law, his company has experienced a sharp -- roughly two-thirds -- decline in the number of liability claims filed against drivers insured by State Farm. The savings are used to pay customers who make personal injury claims under no-fault.
Many of the claims that disappear under no-fault are the $5,000 and $10,000 pain-and-suffering complaints that insurance companies once paid as a matter of course to avoid the expense of trials and the possibility that juries would make far bigger awards, Geico's Aleggi said. As a result of the change in the law, Aleggi said, far more of the premium dollars are being paid to victims and fewer are going to cover lawyers' and court costs.
A two-thirds decline in liability claims "sounds like a lot," said State Farm's Brandau. "But you need a decline of that order to make no-fault work."
The liability claims permitted under no-fault generally are big because the injured party has either accumulated $5,000 in medical bills or satisfied one of the other tests that permit victims to file a liability action against the party judged to be at fault in the accident.
The liability claims that remain, Brandau said -- although they are only about a third the number that would have existed under the traditional system -- represent about half of the payments that would have been rendered under the older liability system.
Although the District system allows an accident victim to sue when medical bills top $5,000, the victim's own insurance company must pay up to $100,000 in medical bills and $24,000 in lost wages. If medical bills exceeded $100,000, the accident victim presumably would sue not only for pain-and-suffering but also for excess medical costs.
Geico's Aleggi said his company already has paid two $100,000 claims -- including one that would have cost Geico only $10,000 under the old system.
Aleggi said a Geico customer hit a pedestrian who was a child. If the child's parents had had auto insurance, their auto insurance company would have been required to pay. But they did not own a car and, under the District's law, the driver's insurer is required to pay the maximum no-fault coverage.
Under the old law, the insurance company would have been required to pay only the maximum liability maintained by the driver -- in this case $10,000 for any injured individual and no more than $20,000 for all parties injured in a single accident. The child's parents would have collected $10,000 from Geico and would have had to rely on their own health insurance and whatever they could extract from the driver's personal assets to pay the child's bills.
Attorney Chaikin said the fact that Geico has paid only two $100,000 claims is proof that the no-fault limits are too high and that consumers are being forced to pay for more insurance than they need. He said a Department of Transportation study showed that 97 percent of all accidents result in medical bills of less than $2,500 and that consumers should be allowed to buy smaller amounts of no-fault coverage if they desire.
Insurance officials said that because most medical payments are small, the difference in cost between, say, $5,000 in no-fault coverage and $100,000 is minuscule.
Chaikin also said that because the law requires auto insurers to pay medical costs of car accidents -- lifting some of the burden off general health insurance -- consumers should receive a rebate on their health insurance premiums.
A spokesman for Blue Cross-Blue Shield, the area's largest health insurer, said auto-related claims always have been a tiny portion of the $700 million paid each year. He said the company can identify only $250,000 in savings as a result of the no-fault law, although the actual figure is probably higher. Nonetheless, he said, savings still are small -- mainly because the most costly medical aftereffects of an accident are long-term disabilities that standard health insurance doesn't cover.
Hunter, of the National Insurance Consumer Organization, said he believes the no-fault law on balance has been a small move in a positive direction. He said the small rate increases that have occurred generally have been unrelated to no-fault.
Insurance Commissioner Stokes and others say the short period of time in which no-fault has been in effect has not given regulators enough information on which to make a valid assessment of it.
An official of a major insurer in the District said it appears so far that the number of liability claims has declined. But, she added, because individuals must accumulate $5,000 in medical bills before they can sue, a number of cases that have not yet reached the ceiling might eventually. "It's too early to tell" whether companies can provide no-fault coverage at the same price as traditional insurance, she said.
The law provides that after three years a special commission must assess the no-fault law and report to the City Council and the mayor. But as one insurance official noted, the District might not have three years to evaluate the system: If Judge Gasch's ruling is upheld, the whole District law could be changed.