Take a typical automobile accident in Montgomery County: On a summer's day, a car heading down Summit Avenue in Kensington rams another. A passenger in the second car, Susanna Tabibi, is injured; she spends a week in the hospital and misses another five weeks of work.
From this unfortunate but routine occurrence, repeated thousands of times a year in Maryland, follows a strange, convoluted tale of insurance companies, lawyers and compensation payments to accident victims. To a lay person or a driver never involved in such an accident, it may seem incredible. And yet, Tabibi's auto accident shows precisely what has happened to Maryland's "no-fault" insurance law, enacted as a reform nine years ago.
Medical bills came to about $2,600 for Tabibi, who suffered a back injury. Lost wages from her work as a domestic in Chevy Chase amounted to about $2,400 more. Maryland's no-fault system was designed to ensure that she collect what she had lost from the accident, no less and no more, and that she get it mostly from the insurance company covering her car, rather than the company of the driver at fault.
Instead, a year after her accident, Tabibi, whose claim is considered small in the state's auto insurance business, has collected a total of about $25,000. Of that sum, a little more than $2,400 came from her car's no-fault insurance policy. The rest came from Geico, the company of the at-fault driver, in an out-of-court settlement. A total of $1,600 will go to a lawyer, Montgomery County Council member David Scull, who says a more typical legal fee probably would have been at least $7,500.
Tabibi's case, added to the thousands of similar small insurance settlements every year, has helped make Maryland one of the most expensive states in the nation in which to have an accident -- or keep an insurance policy.
The state's insurance rates have been increasing at one of the highest rates in the country, according to several studies, and in a fashion that presents a peculiar paradox. Hundreds of victims of minor accidents have been collecting three, four and five times what the system intended them to get. But most drivers unlucky enough to be involved in serious accidents, involving economic expenses that can cripple a family, have been collecting only a fraction of what they lost, even when they are not at fault.
"What we have here is a candy-store operation for small claimants," says James Doyle, an insurance company lobbyist in the Maryland legislature. And companies, insurance department officials and consumer advocates agree that for everyone else, Maryland's no-fault system has meant nothing but expense-- and losses for the seriously injured.
Enacted as part of former governor Marvin Mandel's massive insurance reform package of 1972, this no-fault system was supposed to lower the cost of insurance to all drivers and distribute benefits more equitably among victims of accidents. Instead, while raising costs rapidly, it has left most inequities of the old system in place, and has made some of them worse.
Critics of Maryland's no-fault program now call it "yes-fault" for its cost or "lawyer's no-fault" for the plaintiffs' attorneys who seem to be its sole beneficiaries.
The Maryland legislature, tied up by the conflicting pressures of insurance companies and the plaintiffs' lawyers who fill many of its seats, has done nothing to correct the problem in nine years.
"The time has come to inject some balance into the system," says Maryland Insurance Commissioner Edward Birrane. "The problem has been arriving at a fair consensus of what that balance is."
The failure of Maryland's auto insurance system is not necessarily an indictment of no-fault, a system that during the peak of its popularity in the late 1960s and early 1970s was enacted in some form in almost half the states, heralded as a revolutionary advance in the tangled process of compensation for the victims of America's automobile accidents.
Instead, Maryland's system shows what happened to the pure concept of no-fault insurance after the compromises and rewriting done by a state legislature heavily influenced not only by insurance companies, but by plaintiffs' lawyers, the biggest beneficiaries of accident lawsuits.
Maryland does not have true no-fault insurance, but "add-on" no-fault, a system that attempts to combine the best of the old court-suit system with the ease and equity of no-fault. It is a variation that was popular in the early years of no-fault; eight other states enacted it. But over the years, in state after state, it has not worked the way it was designed to.
To understand what went wrong with the system, it is necessary to delve into the theory of accidents, how victims are paid for their pain and how the various systems determine what they deserve.
No-fault, in many ways, was developed as an answer to inequities in the traditional system of paying for accident injuries. It was not so much that victims were getting too much for their suffering -- the problem was more that victims of minor accidents were being compensated far more than victims of major ones.
Under the standard liability, or fault procedure that existed in Maryland and most other states before 1972, persons injured in accidents that were not their fault filed claims against the companies of the drivers causing the accidents to collect medical expenses, lost wages and other expenses resulting from recovery time from injuries, and often, general compensation for suffering or permanent injuries.
Volumes of research, including an exhaustive study of auto insurance cases by the U.S. Department of Transportation in 1970, showed that the uncertainties of litigation and the pressures for out-of-court settlements resulted in small claims -- which make up the bulk of the cases -- being settled out of court for an average of as much as four times the real cost of medical treatment and lost work.
Meanwhile, victims who deserved large payments frequently got only a fraction of what they should have, because companies would take their cases to court and fiercely contest them. Often the victim, desperately needing money to pay off huge medical bills, would settle out of court for less than the amount lost rather than pursue the endless litigation.
The "model" no-fault system developed by industry experts and endorsed by the DOT attempted to correct these problems through two basic changes. The first called for injured persons to collect from their own insurance companies. Under this plan, policyholders could collect their medical expenses and lost earnings directly and without a determination of fault, eliminating delays and theoretically increasing to a maximum level the money they would receive for these "economic" items.
As an added advantage, all persons injured in auto accidents would be compensated for their losses -- not just those who were not at fault or who had special added coverage.
Once drivers are paid by their insurance companies for medical bills and lost wages, theoretically they should not need to sue the company of the at-fault driver except when they deserve compensation for long-term suffering or permanent disability. This led to development of the second, most controversial principle of no-fault: a limitation on general damage suits arising from auto accidents. The theory is that by curtailing these so-called "pain and suffering" suits, the small claims usually resulting in excessive payments would be eliminated.
When these two fundamental changes in the insurance process are made, two things are supposed to happen. First, more people should be paid for the full amount of their economic losses, while fewer should end up with excessive rewards. At the same time, the reduction in legal suits, overall claims payments and lawyers' fees should drive down the cost of traditional auto insurance more than enough to compensate for the new no-fault coverage, resulting in overall rate reductions.
In Maryland, however, the model no-fault system was rejected. Instead, Mandel endorsed the "add-on" system, which in effect is only half the proposed reform.
The Maryland law contains the "no-fault" coverage for medical costs and wages, with a maximum payment ceiling of $2,500. Instead of limiting lawsuit recoveries under the old law, however, Mandel persuaded the legislature to simply leave it in place. The old and new systems exist simultaneously and overlap.
This deviation from the model system was made for several reasons. No-fault opponents, particularly the powerful organizations representing personal-injury lawyers, argued that limiting general damage suits by any method unfairly limited the right of victims to be compensated not only for economic losses, but for the embarrassment, shock, "pain and suffering" they had undergone through no fault of their own.
It was also felt that the then-proposed method of limiting such suits -- through a dollar "threshold" for damages below which one could not bring suit -- was "meaningless," according to Mandel legislation chief Jack Eldridge, now a state judge, "because anyone could find a way to sue for an amount over the limit."
But perhaps most important, trial lawyers and other proponents of the add-on method argued that the cost savings would be just as much without limiting suits as under the model law. Most victims with minor injuries costing under $2,500, they argued, would be satisfied by their no-fault payment and would feel no need to bring suit. The small claims and excessive rewards that were driving up costs would shrink naturally, without any limitation of a driver's legal rights.
Maryland's system was portrayed as the best of both worlds -- the convenience and efficiency of no-fault plus the full rights of legal action. But the result, say the state's regulators and insurance executives, has been the opposite -- the worst of both worlds.
First of all, the no-fault payments, according to Insurance Commissioner Birrane and the data available from insurance statistical organizations, have failed to significantly reduce the number of lawsuits -- and large out-of-court settlement winnings -- by victims with minor injuries. This has been the case in most other states with "add-on" no-fault laws, studies by regulators and industry experts have shown.
The small claimants and their lawyers are not only collecting the same excessive payments for small injuries that they were under the old system, but are double- and even triple-dipping by collecting no-fault payments from one company and from any health insurance coverage, then suing the at-fault driver for the same benefits -- and settling for more than their cost.
Tabibi's case shows how this happens. Theoretically, after receiving a little over $2,400 in no-fault compensation from her own company, she should have needed to collect only $2,600 more from Geico, the company of the at-fault driver.
Instead, here is what happened: first, Tabibi and Scull forwarded her approximately $2,600 in medical bills to Geico, which promptly paid them -- even though Tabibi had already collected $2,400 from her own company for these costs.
Then, Geico began offering out-of-court settlements to avoid a lawsuit by Tabibi for the lost wages and her "pain and suffering," because insurance companies are still afraid of the legal costs and jury awards of trials in small cases. The final settlement: about $20,000, of which Scull, as the plaintiff's lawyer, is entitled to $1,600.
Tabibi will collect a total of about $25,000 -- minus Scull's $1,600 -- for an accident that cost her only $5,000. The figures were provided by Scull and confirmed by Geico.
"It's an absolutely typical case," says Scull, a strong critic of the present law. "In fact, the reward is even a little low. There is an unwritten standard of a 5-to-1 multiplier of payments to expenses in all these small damage cases."
Meanwhile, if Tabibi had had major losses in medical bills and lost income, she probably never would have recovered what she lost. Accident victims with major injuries and long-term losses and suffering -- the people the no-fault system was designed to help -- are faring only marginally better than they were before the no-fault program was put into effect in Maryland.
Detailed studies in recent years have shown that severely injured victims are collecting only a fraction of what they deserve. One estimate, made during a comprehensive review of no-fault by the Rutgers Law Review in 1977, was that Maryland accident victims as a whole were recouping only 43 percent of their economic losses. The same study estimated that in Michigan, which has unlimited benefits under its no-fault plan but a strict limitation on lawsuits, victims were recovering 99 percent of these losses.
While the problems of the old system are in some ways exacerbated, Maryland also has the new, distinctive problems of the no-fault system, such as inflated medical expenses submitted by doctors for claims that are no longer subject to courtroom cross-examination.
The bottom line, shown by a variety of national studies of add-on states, is that Maryland's system is far and away the most expensive in the insurance market, even though it provides only marginally more protection to those who need it. It is more expensive than other no-fault states because there is no limitation on liability lawsuits. And it is more expensive than the old system because there is an entirely new -- and expensive -- no-fault coverage to pay for.
The premiums paid by Maryland drivers for the old liability coverage rose by an average of 50 percent in the first five years of no-fault, and the cost of liability claims rose 14 percent, even when inflation-driven expenses were taken into account, according to a consultant's study for the American Insurance Association (AIA). Only in add-on no-fault states did this kind of increase take place, the study showed; in states with limitations on suits, the relative cost of liability coverage dropped when inflation was taken into account.
Meanwhile, inflation drove the price of Maryland's no-fault coverage continually higher, so that average base rates as a whole have risen by more than 100 percent since the system went into effect, according to several indicators -- a rate far higher than the national average, government figures indicate. Finally, the AIA and Rutgers studies show that only in other add-on states have rate increases and their mirror image, claims-cost increases, been as steep as in Maryland.
After nine years, Maryland's no-fault plan has only one organized group of defenders: trial lawyers.
"The current system works fine," says Bob Michael, the president-elect of the Maryland Trial Lawyers' Association. The no-fault payments, Michael says, "ensure that the doctors' bills are paid and that the person is made whole. But it doesn't pay for any embarrassment or anguish or permanent suffering that injuries cause -- that's what the court system is for."
Michael and other defenders of the system dispute the figures of the AIA study and other reviews of insurance claims, maintaining that the small court claims have in fact been reduced in Maryland. Even if they have not, defenders of the system maintain that the higher costs in Maryland mean that consumers are getting more from auto insurance -- not that the system doesn't work.
Further, Michael says the rising rates are more the fault of the insurance companies than of any particular system, pointing to increasing investment profits by the huge national companies and arguing that the industry simply uses the delays in the claims system -- which allow the companies to hold on to and invest premium money longer -- to make more money for themselves.
There have been other strong forces helping to halt changes. While Birrane, leading legislators and insurance company executives unanimously agree that Maryland's system is flawed, they have widely disparate views on what should be done to improve it. Some in the insurance industry would like to impose a suit limitation in Maryland; others oppose such a move and instead favor returning to the old system by making no-fault coverage optional.
The lack of agreement, combined with the considerable influence of the trial lawyers in opposing any alteration, has stopped any serious consideration of reform in the legislature in recent years. The only changes have been the result of industry efforts to chip away at the system piece by piece: in separate bills over the years, several classes of commercial vehicles have been quietly exempted from the no-fault system.
"Meanwhile," says Scull, "the plaintiff's lawyers, like those in the legislature, are making out like robbers, and everybody else is getting ripped off."