Colorado’s New Tort Auto Insurance:

Colorado’s experience with no-fault insurance: What went wrong

From April 1, 1974 until July 1, 2003, Colorado maintained a no-fault automobile insurance system. Under this system, all insured motorists who were injured in auto accidents were entitled to no-fault benefits which paid, without regard to fault, for their medical and rehabilitation losses, wage losses and the cost of providing replacement services for household activities they could no longer perform, up to the limits of their policies. In addition, the law contained a “tort threshold” that permitted an injured person to sue an at-fault driver for non-economic damages (commonly referred to as “pain and suffering”) if their economic losses exceeded a certain dollar amount. While the amount of no-fault benefits coverage and the tort threshold varied over the period that no-fault insurance was in effect, at the time the law sunseted in 2003, the mandatory level of no-fault benefits was $130,000 and the tort threshold was $2,500.

Colorado was one of 17 jurisdictions in the United States[i] that adopted no-fault laws in the early to mid-1970s, largely in response to studies that characterized the pre-existing tort auto insurance system as one that provided too much of the auto insurance premium in fees to lawyers and too little in compensation to injured persons. In the early 1930s, a Columbia University study documented the inadequacies of the tort system in both compensating victims and deterring accidents and recommended an alternative approach, modeled after the workers' compensation system. Injured people would be compensated promptly by their own insurer, regardless of fault, and lawsuits for pain and suffering would be prohibited.[ii]

The study attracted little attention until 1965, when Professors Robert Keeton and Jeffrey O’Connell updated the Columbia study in a book entitled Basic Protection for the Traffic Victim. In it, they recommended that the tort system be replaced with a system of guaranteed payment for medical and wage losses in minor accidents. To offset the costs of compensating more people than were entitled to compensation under the fault-based tort system, the authors recommended that lawsuits for pain and suffering be limited to cases involving very serious injuries. In addition, injured people could sue at-fault drivers for any uncompensated economic loss.

In 1971, the U.S. Department of Transportation (“DOT”) issued a 26-volume study that excoriated the tort system and encouraged states to adopt no-fault laws instead. The study concluded that the tort system:

. . . ill serves the accident victim, the insuring public and society. It is inefficient, overly costly, incomplete and slow. It allocates benefits poorly, discourages rehabilitation and overburdens the courts and the legal system. Both on the record of its performance and the logic of its operation, it does little if anything to minimize crash losses.[iii]

The DOT study recommended that lawsuits for pain and suffering be limited to cases of very serious injury.[iv] A year later, the National Conference of Commissioners on Uniform State Laws adopted a model state law, the Uniform Motor Vehicle Accident Reparations Act (UMVARA). UMVARA, which called for high levels of no-fault benefits and a tight tort threshold to limit lawsuits for pain and suffering to cases of serious and permanent injury, became the model for federal legislation and for the no-fault law of Michigan.

Unfortunately, Colorado adopted only half of UMVARA’s prescription, high benefits. Instead of a tight threshold, political compromises led to a weak one. This fatal flaw predictably left too much of the tort lawsuit system in place to prevent insurance costs from rising faster than they would have under the pre-existing tort system. With benefits of $50,000 for medical and rehabilitation expenses as well as benefits for wage loss and replacement services loss, Colorado’s law had the fourth highest level of no-fault benefits of any no-fault state.[v] However, its threshold was one of the weakest in the country, permitting a person to sue for pain and suffering if he or she incurred $500 or more of medical bills. A 1985 study by the DOT found that “there is a clear relationship between the percentage of automobile accident cases which are removed from the tort system by the threshold, and the total amount of money that can be paid to accident victims in the form of no-fault (PIP) benefits and to third-parties in the form of bodily injury liability (BI) damages, without an adverse effect being experienced in the State in the form of an increase in premium rate . . . beyond what there would have been in the absence of no-fault auto insurance.”[vi] The study cited Colorado’s law as out-of-balance in this key respect.[vii]

Other states whose benefit levels were out-of-balance with their tort threshold changed their laws over time to keep costs close to what they had been under the pre-existing tort system. For example, New Jersey and Pennsylvania both lowered their no-fault benefit levels significantly and changed from a fixed dollar threshold that could be easily breached to a “verbal” or “descriptive” threshold that permitted lawsuits for pain and suffering only in defined cases of serious or permanent injury, such as death or dismemberment. In the 1990s, both New Jersey and Pennsylvania moved to a choice system, whereby motorists could choose between a system with no limitations on the right to sue and one with a verbal threshold that eliminated most lawsuits. The limited lawsuit or no-fault option is significantly less expensive than the unlimited lawsuit option in both states.[viii]

Alone of all the original no-fault states with high benefits, Colorado did not change its threshold from a monetary one to a verbal one. Instead, in 1985, it simply increased the level of economic loss necessary to sue from $500 to $2,500. Not only was the increase insufficient to offset the costs of the no-fault benefits, which were raised at the same time to $130,000, the higher dollar threshold created an incentive for the unscrupulous to pad their bills in order to reach the threshold and sue. Thus, the new threshold not only failed to reduce lawsuit costs, it also increased the cost of the no-fault side of the system as people ran up higher bills to cross the threshold.

As a result of having an out-of-balance no-fault system, Coloradoans had experienced unnecessarily high insurance rates for many years. As late as 1995, in a system designed to be primarily one which dispenses its benefits through a no-fault system without lawyers, nearly 50 percent of the average loss costs for the bodily injury portion of auto insurance [no-fault or PIP benefits plus bodily injury liability and Uninsured Motorist/Underinsured Motorist (UM/UIM) coverage] was still being incurred on fault-based claims and lawsuits for pain and suffering.[ix]

The passage of time has further reduced the effectiveness of the $2,500 threshold, as inflation alone has made far more people eligible to sue. The Insurance Research Council (IRC), for example, found that between 1997 and 2002, the number of PIP claimants eligible to pursue liability claims increased from 30 percent to 45 percent, a jump of 50 percent in just five years.[x] However, it was the dramatic increases in PIP loss costs (and thus premiums) that drove the move for reform of the auto insurance system. After years in which PIP loss costs were close to the level of increases in the cost of inflation for medical care, PIP loss costs started to climb dramatically, going up 14 percent in 2000, 16 percent in 2001 and 20 percent in 2002. While claims frequencies remained similar, claim severity (the amount paid per claim) rose dramatically.[xi] Similarly, for the period from 1997 to 2002, the IRC found that “the average PIP medical loss (the largest component of PIP costs at 88 percent) grew by 125 percent in Colorado (which registered the highest increase among no-fault states) . . . .”[xii]

There was much speculation as to the causes of the sudden rise in PIP costs. A November 2003 study by the National Association of Independent Insurers (“Colorado Report”), for example, attributes the rise in PIP costs to the fact that “PIP claimants in Colorado tend to report slightly more injuries per claim, visit more health care professionals, have longer restricted activities, and take longer to return to work and resume daily activities than elsewhere in the country. The use of attorneys has also contributed to larger PIP loss dollars.”[xiii] A comprehensive nationwide study of claims found that “the growth in medical losses (for both bodily injury claims and PIP claims) appears to be caused by shifts towards more expensive treatment alternatives (e.g., from x-rays to MRIs) and by increases in the charges for the services provided (particularly for chiropractors and physical therapists).”[xiv] The same study also suggested that the dramatic increases in PIP costs might have a structural basis: “One theory is that some participants in the medical care system, with their revenues under pressure from cost-controlling measures from government and private health insurance plans, are depending on one of the few remaining sources of unmanaged care – auto injury insurance – to fortify their balance sheets.”[xv] The no-fault system was an even more attractive source of payment because, unlike health insurance, it contained significant penalties for auto insurers that failed to pay a claim within 30 days, including the payment of a reasonable attorney’s fees and an interest penalty.

The governor and the legislature considered several alternative approaches to bring the no-fault system under control. One such approach would have imposed restrictions on the types of services that were eligible for reimbursement, limited how much providers could be paid, reduced the PIP benefit levels and tightened the lawsuit threshold to bring the system into balance. A December 2002 actuarial study estimated that the adoption of such legislation would have reduced the average premium by approximately 13-16 percent, or by 10-14 percent if the PIP levels remained the same.[xvi] Another approach, authored by Representative Tom Wiens,[xvii] would have permitted motorists to purchase, as an alternative to the existing no-fault coverage, a no-fault policy that would have limited lawsuits to suits for uncompensated economic loss only (and not for pain and suffering). The congressional Joint Economic Committee (JEC) estimated, in a 1998 study, that such legislation would have reduced overall premiums for the average driver in Colorado by 26 percent in that year.[xviii]

When the two major reform proposals that would have maintained the no-fault system and its very generous guaranteed benefits for injured motorists, either as an amended no-fault law or as a choice no-fault system, failed to pass the legislature, the result was a sunset of the no-fault law and a return to the tort system.

The tort system is fundamentally different than the no-fault system in that motorists insure themselves through bodily injury liability coverage to protect their assets if they are found at fault in an accident with another driver. Unlike no-fault insurance, under which the driver’s own insurance guarantees payment for his or her injuries, regardless of fault, bodily injury liability insurance provides no compensation whatsoever for one’s own injuries in an accident. An injured person is entitled to compensation only if he or she can identify the other driver, establish in a claim or lawsuit that that person was at-fault in the accident and prove that they themselves were free from fault or less at fault than the other driver. Even if the injured person can prevail in his or her claim or lawsuit, their recovery is still constrained by a factor they cannot control, the amount of insurance carried by the other driver. The at-fault person must have adequate insurance to cover the loss, taking into account the fact that the injured person must pay his or her attorney one-third of the amount recovered from the other driver.

In evaluating the new tort insurance system, one must look at both the cost of the insurance and the benefits it provides injured people. The NAII Colorado Report looks at the cost issue only. This study, by contrast, looks at both what motorists will be paying for auto insurance under the new tort system and at what benefits they will receive should they be injured in an auto accident – the two issues of concerns to motorists in an auto insurance policy.

Cost savings under the new tort auto insurance are minimal – and the swift, sure and high-level compensation benefits of no-fault have been lost

Premium savings for drivers who purchase only the mandatory coverage

The 2003 Colorado Report provides data on the impact of the new tort system on premiums. It highlights two savings numbers – a 27.2% reduction in the statewide average annual premium for drivers who purchase only the “required” liability coverage (bodily injury and property damage liability) plus UM/UIM, and a 14.7 percent savings for the drivers who purchase “full” coverage, which the report defines as the mandatory liability coverage, UM/UIM, and collision and comprehensive property damage coverage, insurance that pays for damage to the car, regardless of fault.[xix]

The savings numbers for people who buy the mandatory coverage only are substantial but they apply only to a distinct minority of all drivers and, more importantly, they are of little or no value to most of those drivers. Nearly 70 percent of all drivers buy higher bodily injury limits to protect their assets.[xx] In addition, more drivers still are forced to buy collision and comprehensive coverages because lenders will not finance cars for people who do not carry these “non-mandatory” coverages, because collision and comprehensive provide a guaranteed source to pay off the loan in case something happens to the car and the borrower doesn’t have other resources to pay it back. As a result, the vast majority of Colorado drivers purchase full coverage, not just the required coverage.

Thus, this savings number applies to a relatively small fraction of all insured motorists. Many of the people who purchase just the required coverage are low-income drivers who have few, if any, assets, to protect. For them, tort auto insurance is of no value because it only protects their assets, and they don’t have any assets to protect! The tort coverage’s value is not to the low-income driver who is required to purchase it but to other drivers who are injured by low-income motorists in that it provides a pot of money to pay the losses they incur when the low-income driver is at fault.

By contrast, under the pre-existing Colorado no-fault system or any other no-fault system, no-fault benefit or PIP coverage has great value to low-income people because it provides them with guaranteed benefits, regardless of fault, if they are injured in an auto accident. This protection is particularly important to low-income people because they are less likely than other motorists to have health insurance.

In sum, for low-income drivers, the switch from no-fault to tort reduces the value of their insurance to them to zero, while the cost remains at nearly 75 percent of what they used to pay for no-fault insurance that had real value for them.

Premium savings for drivers with full coverage

Here the Colorado Report finds a statewide average savings of 14.7 percent ($150), a far more modest number, in the cost of the typical policy, one that includes bodily injury and property damage liability coverage, as well as collision and comprehensive coverage. Even at that, the number overstates the real savings for the average driver for the following reasons:

The savings number does not include the cost of MedPay coverage. While the study points out that only 25 percent of Colorado motorists presently carry MedPay coverage, it clearly states that: “This number is dynamic in the sense that it is expected to go up over time.”[xxi] In fact, national figures back up that conclusion. For example, a 1992 National Association of Independent Insurers study, entitled Automobile Experience, found that about 86 percent of drivers in tort states carried MedPay coverage. The Colorado Report suggests the magnitude of this omission when it states that “the premium difference between not buying optional medical payments coverage (in Table 2A) versus buying the coverage (in Table 2B) . . . can range anywhere from 3 percentage to 15 percentage points.”[xxii] The December 2002 Lehmann actuarial study estimated that coupling $5,000 of MedPay coverage with repeal of the then-existing Colorado no-fault law would reduce the average premium savings, from 16.7 percent to 9.2 percent, a reduction of approximately 45 percent in the amount saved.[xxiii]
The savings numbers do not include the shift in costs to health insurance and government programs such as Medicaid and Medicare. Under Colorado’s no-fault law, a person involved in a single car accident, such as someone who skids off a mountain road into a tree in a snowstorm, received payment for his or her injuries from the PIP no-fault benefits coverage. Under the tort system, the injured person would receive nothing from bodily injury liability coverage and, instead, would have to seek compensation from his or her health insurance. That will increase the cost of both private health insurance and government programs.[xxiv]

A more realistic assessment of the true cost to the average Colorado motorist of the change to tort auto insurance – including $5,000 of MedPay coverage (the most common amount carried) and the higher cost for health insurance when it has to absorb a substantial portion of the costs presently borne by auto insurance – would likely show minimal savings.

It is also important to keep in mind that the Colorado Report is merely a snapshot of what insurers are guessing their costs will be. The report is based on rate filings before any actual loss experience. The real cost will not be known for several years, until the time for filing lawsuits has passed and all the claims have been settled or tried. The actual experience could be either better or worse than the estimates contained in these initial insurer rate filings.

Of even greater importance is the fact that an examination of costs alone does not give Coloradoans the full picture of the impact of the change from the no-fault system to the new tort system. If costs are likely to be close to a wash, the compensation picture is more akin to a wipeout.

Compensation for accident victims under the new Colorado tort insurance system: a huge shift from payment to victims to payments to attorneys and increased fraud

Auto insurance is a product that combines two key elements for consumers – costs and benefits. Any insurance product can be made less costly to consumers by simply reducing the benefits. For example, had the Colorado legislature reduced the PIP benefits from $130,000 to $25,000, premiums would have declined significantly. Of course, so would the value of the coverage to motorists who were seriously injured.

Instead, by sunseting the no-fault law and returning to the tort system, Colorado has lowered premiums slightly, at the expense of providing timely and adequate compensation for people injured in auto accidents. Under the no-fault system, an injured person merely had to submit a claim for medical or work loss expense, without having to prove fault, and legitimate claims had to be paid within 30 days. By contrast, under the new tort system, an injured person can recover compensation for such losses only if he or she can identify the at-fault driver, establish that that driver was legally at-fault in the accident and establish that the injured person was free from fault or less at fault. The injured person must file a claim against the other driver and be prepared to sue if the other driver’s insurer refuses to settle the claim. This is not a quick process, taking close to a year and a half for the average serious injury claim to be resolved.[xxv] Even then, the amount of recovery is limited by the amount of coverage elected by the other person. Lastly, the injured person will only net about two-thirds of any recovery, with the rest going to his or her attorney.

As indicated earlier, the failures of the tort system as a compensation system have been documented in independent studies in this country for more than 70 years. Besides the slowness of payment and the uncertainty of whether the other driver has the necessary amount of insurance to compensate an injured person for his or her injuries, here is what the change to tort means as a practical matter for auto accident victims in Colorado.

Approximately one-third of all injured persons will receive no benefits whatsoever from their bodily injury liability or UM/UIM coverage[xxvi]

Nationally, in tort states, 30 percent of all injured persons receive no compensation whatsoever from the tort system. The largest single category of uncompensated people are those injured in single car crashes. By the rules of the fault-based tort system, an injured person may recover only if another person is at-fault and that is not the case when a motorist skids off a mountain road in a snowstorm and hits a tree. You can’t sue a tree. The number of uncompensated motorists in Colorado is likely to be higher than in other states because of the mountains and the weather. By contrast, under Colorado’s no-fault system, all injured persons were entitled to up to $130,000 of medical and work loss benefits.[xxvii]

For those who do recover, people with minor injuries are overcompensated while those with serious injuries are grossly undercompensated

Specifically, a 1991 RAND Institute for Civil Justice study found that people in tort states with economic losses of $500-$1,000 recover on average 250 percent of those losses; those with losses of $25,000-$100,000 recover on average 56 percent; and those with losses over $100,000 recover on average only 9 percent of their economic losses.[xxviii]

This is a compensation system turned on its head. Financial consumer writer Andrew Tobias says that this system is “like homeowner’s insurance that pays triple if your stereo’s stolen (or you say it was) but only 9 percent if the house burns down.”[xxix]

The RAND findings are consistent with those from the 1971 DOT study[xxx] and largely reflect the fact that the average bodily injury liability coverage for one person is about $75,000.[xxxi] To add insult to injury, the RAND numbers are gross recovery figures, the amount paid to an injured person before the victim pays his or her attorney. The injured person typically retains only two-thirds of this amount, after paying one-third to his or her lawyer, to pay for doctors’ bills and lost wages. That means that in the typical accident involving two drivers with average coverage, the maximum an injured, not-at-fault person can expect to receive from the other driver’s coverage for compensation of loss is $50,000. This amount may be sufficient to pay for a minor injury, but it is woefully inadequate to cover the economic losses of a serious injury, let alone any pain and suffering.

While injured persons will find it more difficult to receive adequate and timely compensation for their economic losses, particularly in serious injury cases, attorneys will see their fees increase exponentially

Under Colorado’s no-fault system, 51 percent of the bodily injury premium went for tort liability coverage (bodily injury liability and UM/UIM), with the rest being paid out under the no-fault PIP portion and Medical Payments coverage.[xxxii] Lawyer involvement in the PIP process in Colorado has been minimal, approximately 15 percent,[xxxiii] with most of those PIP claims associated with attorneys helping claimants with tort claims, i.e., where the loss exceeded the $2,500 tort threshold.[xxxiv] Under the new tort insurance system, almost the entire bodily injury premium will be fault-based, with the minor exception of MedPay coverage. The result will be that almost all of the bodily injury premium – as compared to 50 percent under the no-fault system – will be paid out through the highly inefficient tort system.

The 2003 JEC Committee study shows just how inefficient a compensation system the tort system is. It finds that attorneys for the two sides, plaintiffs and defendants, receive more money from a dollar of premium – 25.5 percent – than do injured persons for their legitimate medical bills and lost wages – 19.3 percent.[xxxv]

Another 20 percent of the premium goes for pain and suffering.[xxxvi] Unfortunately, because of the limited amount of bodily injury coverage carried by most motorists, most of these dollars go to people with the smallest economic losses. As discussed above, people with high economic damages and the most demonstrable pain and suffering, those with lifelong brain or spinal cord injuries, for example, almost never receive anything for pain and suffering because their economic losses eat up all of the available insurance.

The tort system encourages the filing of fraudulent or excessive claims

The major reason for repeal of the Colorado no-fault law was the huge increase in the cost of PIP coverage, starting in 2000, driven by dramatic increases in the average amount of PIP claims. However, claims experience in tort states clearly indicates that excessive claims – and outright fraud -- will not disappear under the tort system. To the contrary, the JEC estimated that 16.3 percent of the bodily injury liability premium dollar goes for the payment of fraudulent and excessive claims, as a result of the incentives of the tort system.[xxxvii]

How does the tort system encourage fraudulent claims? It does so by routinely awarding a multiplier of the amount of economic loss (medical bills and lost wages) for noneconomic damages, or pain and suffering. U. S. Senator Mitch McConnell (R-KY) described the incentives for fraud in the tort system in his statement on the floor of the Senate when introducing S. 837, the Auto Choice Reform Act of 1999:

Why would an injured party inflate their medical claims, you might ask. It’s simple arithmetic. For every $1 of economic loss, a party stands to recover up to $3 in pain and suffering awards. In short, the more you go to the chiropractor, the more you get from the jury. And, the more you get from the jury, the more money your attorney puts in his own pocket.[xxxviii]

The pain and suffering multiplier encourages people to file claims for nonexistent injuries or to run up unnecessary bills to increase their recovery—and that of their doctor and lawyer.

Both the RAND Institute for Civil Justice and the IRC have estimated that more than one-third of all bodily injury liability claims fit into these categories of “excess” medical claims.[xxxix] Some of these excess claims are caused by staged accidents, but the vast majority is merely the everyday padding of claims to increase recoveries. Importantly, the IRC found more suspected fraud and/or buildup in bodily injury liability claims than in PIP claims, by a margin of 36 percent to 21 percent.[xl]

Compensation for seriously injured auto accident victims under the new tort auto insurance system as opposed to under the old no-fault system

Most people have the means to pay for minor losses that result from an auto accident, but they need insurance to protect them in serious injury cases. That will not be the case under the tort auto insurance system, in sharp contrast to the pre-existing no-fault system.

Example of a serious accident in which motorists Dick and Jane are both seriously injured

For purposes of illustration, take the following example of two typical motorists who are seriously injured in an accident.

Example. Dick and Jane each incur $100,000 of medical expenses and lost wages in an accident in which Dick is completely at fault. Dick and Jane each carry “75/150”of bodily injury liability coverage, the approximate albeit theoretical average amount carried by motorists, which provides for the payment of up to $75,000 to any one individual injured by the insured motorist.[xli]

What would happen to Dick and Jane under Colorado’s new tort insurance system

Jane. Jane sues Dick and recovers $75,000, the limits of his auto insurance policy.[xlii] Jane’s attorney takes a fee of $25,000, the customary one-third contingency fee. Thus, Jane’s net recovery is $50,000, an amount that is equal to only half of her full economic loss.[xliii] By definition, in this “best case” scenario for Jane where she is completely free from fault, she recovers only 50 percent of her economic loss and there is no money available to pay for her pain and suffering.[xliv]

Dick. Because Dick was at fault, he has no right to recover under the tort system. He can utilize his $5,000 in MedPay coverage, which is nothing more than no-fault benefits coverage for medical expenses, to pay a small fraction – 5 percent -- of his economic loss.

While this would be the most typical result, of course, in individual situations, seriously injured people could fare better or worse. If Jane were “fortunate” enough to be injured by someone with bodily injury liability coverage in excess of $100,000, which would occur statistically in about one in six accidents (16%),[xlv] then her recovery might approach her $100,000 of loss. Of course, even in that case, Jane’s recovery would be reduced by one-third to pay her attorney. And, if Jane in any way negligently contributed to causing the accident, her recovery would be reduced by the percentage of her negligence. It is almost equally likely (14 percent) that Jane would be injured in an accident with an uninsured motorist, which would mean that her recovery would be limited by the amount of her uninsured motorist coverage, typically only 25/50. And, it is statistically far more likely than either of these possibilities, nearly a one in three chance, that Jane will be injured in a single car accident or in another situation where she is entitled to nothing at all under the tort system. In that case, her only recovery from auto insurance would be from her $5,000 MedPay policy.

What would have happened to Dick and Jane under Colorado’s old no-fault system

Because the no-fault system paid without regard to fault, both Dick and Jane would have been entitled to complete compensation for their $100,000 of economic loss. Because Jane’s injury exceeded the $2,500 threshold, she would have been able to sue Dick for pain and suffering, netting another $50,000 from his bodily injury liability coverage for her pain and suffering. And both Dick and Jane would have been paid as their economic losses accrued and not have to wait until the lawsuit was over.

The new tort auto insurance system is putting enormous strain on Colorado’s emergency care system

Automobile accidents are the single largest source of admissions to Colorado’s trauma care system, constituting approximately 59 percent of all admissions. Under the no-fault system, all insured motorists in Colorado were entitled to up to $100,00 of medical and rehabilitation benefits, more than enough to cover the emergency care costs of the vast majority of auto accident victims. Most Colorado drivers had policies that paid generous fee-for-service reimbursement rates. Moreover, Colorado law required insurers to pay bills within 30 days of receipt. The result was that emergency care providers were promptly and well compensated for almost all auto accident victims.

The return to tort auto insurance on July 1, 2003 has radically changed the landscape for emergency care for these victims. As discussed previously, tort claims are paid only to victims who are free from fault or less at fault than the at-fault driver. By definition, this excludes nearly one-third of all auto accident victims, most prominently those involved in single car crashes. Even for those who do recover payments, inadequate insurance coverage for many drivers and high plaintiff’s attorney fees often reduce tort insurance payments below the level needed to pay the cost of emergency care. Moreover, since serious injury cases can take years to be resolved, the delay in payment further aggravates the difficulties emergency care providers have recovering the costs of auto accident victims.

As a result, more of the burden falls on health insurance, which is not as universally comprehensive as no-fault benefits were and often pays far less. Managed care contracts with health insurers have generally been predicated on the assumption that most auto accident victims will be well compensated from no-fault benefits and so provide lower rates of reimbursement for accident victims than the no-fault system. It is likely to take trauma care centers two to three years to renegotiate these contracts and, even then, the reimbursement rates are likely to be less generous than those that prevailed under the no-fault system.

All of these factors combined are having a devastating effect on emergency care in Colorado. As indicated above, most serious injury victims requiring care in a Trauma Center were injured in a motor vehicle crash, and, between July 1, 2002 and June 30, 2003, Colorado’s no-fault system paid $73 million towards their care. Payments from auto insurance for the first six months under the new tort system indicate this amount will drop to $16 million annually, for a shortfall of $57 million. This data also indicate payments from other insurance sources (Medicare, Medicaid and health insurance) will only make up $10 million, leaving a net shortfall of $47 million.[xlvi] These amounts do not include the treatment of auto injury victims who require emergency care but do not meet trauma center triage criteria, or pre-hospital or rehabilitation care for all those injured in motor vehicle crashes.

Recommendations to improve Colorado’s auto insurance system for both its motorists and its emergency care system

The single most important thing Colorado motorists have lost with the change from no-fault to tort auto insurance is guaranteed care for serious injuries incurred in an auto accident. If this protection is not afforded soon, then the problem is liable to get worse as the absence of a guaranteed source of payment could well threaten the existence of trauma care centers and other emergency care services.

More generally, the problem is that, in order to address a sudden spike in the cost of the PIP portion of the no-fault auto insurance system, the Colorado legislature and governor threw the baby out with the bathwater. By returning to the tort insurance system, Colorado eliminated the huge compensation benefits of the no-fault system – prompt assurance of medical and work loss benefits for all injured persons up to $130,000 – in return for a minimal reduction in premium. Had Colorado, instead, chosen to eliminate lawsuits for pain and suffering, reduced no-fault benefits slightly and eliminated the most obvious areas of unnecessary or excessive claims in the PIP system, it would have produced an “in-balance” no-fault system with high levels of guaranteed compensation for injured persons and reduced premiums far more than they have been under the tort system.

In order to improve auto insurance for Colorado motorists, this study makes two recommendations, a short-term fix and a long-term fix.

Recommendation #1: Add a Requirement to the Tort Auto Insurance System that Drivers Carry Medical Payments Coverage for Emergency Care, Payable without Regard to Fault.

Such a provision would address the single greatest failing of the tort system – the absence of guaranteed payment for emergency care for all injured persons after a serious auto accident. The addition of such coverage will, of course, result in somewhat higher premiums than present; however, such coverage will not lead to the runaway costs that were infecting the PIP system in the early 2000s. Those were associated with excessive usage of and charges for services for soft tissue injuries, injuries whose extent is difficult to quantify. Injuries that require emergency care cannot be faked and emergency care, by definition, cannot continue for a prolonged period of time.

In order to keep the cost of the new Emergency Care Medical Payments coverage as low as possible, the study recommends that (1) payment be for reasonable and necessary expenses for emergency care and treatment only and (2) the cost of emergency care services not be recoverable in a lawsuit against an at-fault driver.

Limiting the payment to reasonable and necessary expenses is standard language contained in insurance contracts to make sure that people receive appropriate care at reasonable prices. Prohibiting an injured person from recovering the value of the medical payments benefits one receives from one’s own insurer a second time through a lawsuit is standard practice in all no-fault states and in some so-called “add-on” no-fault states, ones which have first party benefits for medical and wage loss but do not limit lawsuits in any way. This provision will reduce the cost of auto insurance by eliminating the possibility of duplicative recovery for the same loss, both through one’s Medical Payments coverage and then again through a lawsuit recovery against an at-fault driver. Prohibiting duplicative recovery from bodily injury liability coverage will offset some of the cost of the Emergency Care Medical Payments coverage, i.e., the cost of bodily injury liability coverage will decline to the extent that motorists who previously would have used that coverage to recover for their emergency care will now have such care paid for through the new Medical Payments coverage.

Motorists can also keep their premium costs down by electing not to purchase the old MedPay coverage, a coverage that duplicates what most people have through their health insurance and one that is not nearly as valuable to them as emergency care coverage.

Recommendation #2: Permit Colorado Motorists to Choose between the Tort System and a No-Fault System that Permits Lawsuits for Uncompensated Economic Loss Only.

In America today, consumers typically choose among a wide variety of different products and providers to meet their needs. This is true not only among cereals and soaps, but among different life insurance products, investment products and telephone companies. Auto insurance is one of very few remaining products where Coloradoans have no choice. They must buy one form of coverage today, tort insurance, just as for the previous 29 years they had only one choice, no-fault auto insurance.

Legislators at both the federal and state level have introduced bills that would enable motorists to choose either a slightly modified version of the tort system or the no-fault insurance system, depending upon which they believe better fits their needs and desires. Two states – New Jersey and Pennsylvania – have a version of auto choice in place, although the structure of their plans is not as sophisticated as either the federal legislation or that of Colorado State Representative Tom Wiens, SB03-1321. For more details as to how auto choice works, see, for example, the 1999 Congressional Record statements of U. S. Senators Mitch McConnell, Joseph Lieberman and John McCain, the September 9, 1998 testimony of former Denver Mayor Wellington Webb before the Senate Committee on Commerce, Science, and Transportation and an article entitled A Federal Bill, with Commentary, to Allow Choice in Auto Insurance, by Professor Jeffrey O’Connell, Peter Kinzler and Hunter Bates in the Connecticut Insurance Law Journal (Volume 7, Number 2, 2000-2001).

The JEC has estimated that adoption of an auto choice plan in Colorado would enable motorists who choose the PIP or no-fault option to save 21 percent on their total auto insurance premium.[xlvii] The RAND Institute for Civil Justice has estimated that those who choose to stay in a modified tort system would see their premiums decline by approximately 3 percent.[xlviii]

The following comments of former Denver Mayor Webb on a federal auto choice bill would apply equally to an auto choice law in Colorado:

. . . the vast majority of people, in the vast majority of circumstances, will be more fully and more quickly compensated, and receive a fairer return on their auto insurance investment, under the personal protection insurance (no-fault) option in the Auto Choice bill.

. . . it is important to remember that this legislation gives drivers a choice, not a mandate. In particular, drivers would have the option to remain with traditional tort liability coverage. They would decide whether they wanted to pay a significant portion of their premium for the expensive and often protracted avenue of suing for noneconomic damages.[xlix]

Conclusion

In search of a way to lower auto insurance premiums, Colorado has thrown the baby out with the bathwater – it has achieved minimal savings at the expense of one of the country’s best systems of compensation for auto accident victims.

This study makes two recommendations, both of which would address the most serious shortcomings in Colorado’s auto insurance system -- the absence of insurance protection for seriously injured people. The first, adding a new Emergency Care Medical Payments coverage, would protect all insured Coloradoans in the event of serious injury and would strengthen the emergency care system. The second, giving drivers the choice between tort and no-fault insurance, is a more comprehensive solution that would combine the benefits of the first recommendation with the ability of motorists to lower their premiums significantly. Both would produce a dramatically better auto insurance system for Colorado motorists.

[i] The others were Connecticut, the District of Columbia, Florida, Georgia, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Dakota, Pennsylvania and Utah. A no-fault jurisdiction is one in which the law provides for both the payment of no-fault benefits and a tort threshold, a restriction on the right to sue for pain and suffering.

[ii] Columbia University Council for Research in the Social Sciences, Report by the Committee to Study Compensation for Automobile Accidents (1932), 216-217.

[iii] United States Department of Transportation, Motor Vehicle Crash Losses and Their Compensation in the United States: A Report to the Congress and the President (March 1971), 100 [hereinafter “DOT study”].

[iv] Ibid.,136.

[v] The original no-fault laws in Michigan, New Jersey and Pennsylvania all provided for unlimited medical and rehabilitation benefits, as well as benefits for work loss and replacement services loss.

[vi] United States Department of Transportation, Compensating Auto Accident Victims: A Follow-up Report on No-Fault Auto Insurance Experiences (May 1985), 95.

[vii] Idem.

[viii] In Pennsylvania, according to Chuck Romberger, Property & Casualty Actuarial Supervisor, Pennsylvania Insurance Department, motorists pay 40 percent less for the limited tort option, which the insurance department defines to consist of all first party benefits, as well as bodily injury liability and Uninsured Motorist/Underinsured Motorist (UM/UIM) coverage. Pennsylvania’s first party, no-fault bodily injury coverage includes $5,000 of benefits for medical and rehabilitation expenses. Its tort threshold for suits for pain and suffering is a verbal one, cases of “serious injury.” It also permits such suits where the at-fault driver engaged in egregious behavior, such as drunk driving. The full-tort option contains the same first party benefits but places no limitations on maintaining lawsuits for economic and non-economic damages. In New Jersey, “ the premium for (the no-limit-on-lawsuit) option is significantly higher than for the lawsuit limitation threshold option which limits an individual’s right to sue (for pain and suffering to cases of death or serious injury).” New Jersey Department of Banking and Insurance, Auto Reform Update (2004).

[ix] It is impossible to determine the exact percentage because the data on loss costs is collected for bodily injury liability but not for UM/UIM, the other portion of bodily injury coverage that is fault-based. However, it is possible to estimate the percentage by combining two data sources. In 1995, according to data published by the National Association of Insurance Commissioners, bodily injury liability loss costs constituted 40.5 percent of the costs of bodily injury liability and PIP combined. National Association of Insurance Commissioners, Private Passenger Auto-Fast Track Data (1995) [hereinafter “Fast Track Data”]. Unfortunately, the Fast Track system does not include data for UM//UIM coverage. This coverage is also a fault coverage and so belongs in the liability portion of the premium. A 2002 actuarial study of the current average premium in Colorado (the amount actually charged, as opposed to loss costs, the actual cost to the insurer of paying claims) found that UM/UIM coverage constituted approximately 25 percent of the total bodily injury liability portion of the premium (bodily injury liability plus UM/UIM coverage). Miller, Herbers, Lehmann & Associates, Inc., Colorado No-Fault Automobile Insurance: Actuarial Study (December 2002), 15 [hereinafter “Lehmann study”]. If that same ratio were true for bodily injury liability loss costs in 1995, then the liability portion of the total bodily injury premium would have been 47.6 percent of the total bodily injury premium.

[x] Insurance Research Council, Auto Injury Insurance Claims: Countrywide Patterns in Treatment, Cost and Compensation (December 2003), 18 [hereinafter “Auto Injury study”].

[xi] Fast Track Data, supra, note ix.

[xii] Auto Injury study, supra, note x, at 74,76.

[xiii] National Association of Independent Insurers, Colorado’s Transition From No-Fault to Tort Auto Insurance: How the Sunset of the No-Fault Auto Insurance Law Changed Rates, A Report to the Governor and the General Assembly (November 2003), internal fn. v at 12 [hereinafter “Colorado Report”].

[xiv] Auto Injury study, supra, note x, at 2.

[xv] Idem.

[xvi] Lehmann study, supra, note ix, at 3, 15. HB03-1225, the bill introduced by Representative Tambor Williams, Chair of the House Business Affairs and Labor Committee, contained most of the elements of the reform package, except for the reduction in the level of medical and rehabilitation benefits.

[xvii] See HBO3-1321.

[xviii] Joint Economic Committee, Auto Choice: Impact on Cities and the Poor (March 1998), 35. While the study occurred before the dramatic increases in PIP loss costs, starting in 2000, an updated study by the Joint Economic Committee in 2003 estimated that switching from tort to a no-fault system with $25,000 of PIP benefits in Colorado would reduce the average motorist’s premium by approximately 21 percent from the present level. Joint Economic Committee, Choice in Auto Insurance: Updated Savings Estimates for Auto Choice (July 2003), 12 [hereinafter “JEC 2003 study”].

[xix] Colorado Report, supra, note xiii, at 6.

[xx] A 2003 closed claim study of 72,354 claims nationwide found that only 31 percent of motorists had policy limits of 25/50 (or less), with the rest carrying higher levels of coverage. Auto Injury study, supra, note x, at 24. There is no reason to believe that the profile is any different in Colorado.

[xxi] Colorado Report, supra, note xiii, at 3.

[xxii] Ibid, 8.

[xxiii] Lehmann study, supra, note ix, at 21.

[xxiv] The Lehmann study, supra, note ix, at 4, said that, in returning to tort, “some costs may be shifted to other sources (such as individual payments, governments programs and health insurance).” The magnitude of this cost shift to Medicare, a federal program, and Medicaid, a shared federal-state program, is reflected in the fact that, in 1994, Medicare and the federal portion of Medicaid together paid for 14.4 percent of all medical costs resulting from motor vehicle crashes. In no-fault states, public sources paid for just 11.8 percent of the medical cost of auto accidents, less than half of the 27.4 percent average in tort states. U.S. Department of Transportation, National Highway Traffic Safety Administration, The Economic Cost of Motor Vehicle rashes, 1994 (1996), 47, 40.

[xxv] DOT study, supra, note iii, at 43. The recent Auto Injury study, supra, note x, at 130, found that “(f)or BI claimants, nearly eight in ten attorney represented claimants (79 percent) waited more than six months before the final payments were made to claimants, including 48 percent who waited more than a year.” A 1999 study of the 75 largest counties in the United States found that 26.2 percent of auto tort cases took two to four years to resolve and 6.9 percent took more than four years to resolve. United States Department of Justice, Civil Jury Cases and Verdicts in Large Counties 1996 (1999), 13.

[xxvi]United States Department of Transportation, National Highway Safety Administration, Traffic Safety Facts 1997 (1998), 90.

[xxvii] While a driver’s bodily injury liability coverage would not apply, a person who carried MedPay coverage would get some compensation from his or her auto insurance. Of course, MedPay is really no-fault benefits coverage for medical expenses by another name and $5,000, the average MedPay coverage, is a far cry from Colorado’s $130,000 of no-fault benefits.

[xxviii] Stephen Carroll et. al., No-Fault Approaches to Compensating People Injured in Automobile Accidents (RAND Institute for Civil Justice, 1991), 21-22.

[xxix] Auto Choice Reform Act: Hearing Before the Senate Committee on Commerce, Science and Transportation, 104th Congress (1996), 116.

[xxx] The DOT study found that people with economic loss between $1 and $499 recovered, on average, 4 ½ times their loss while those with loss over $25,000 recovered only 30 percent of their economic loss. United States Department of Transportation, Economic Consequences of Automobile Accident Injuries (1970), 47.

[xxxi] The Auto Injury study found that, in 2002, 48 percent of motorists nationally had bodily injury liability limits of $50,000 or less while 52 percent had limits of $100,000 or more. Auto Injury study, supra, note x, at 24. When those numbers are adjusted to reflect the fact that 14 percent of the population is uninsured [Insurance Research Council, Press Release, Uninsured Motorists (August 12, 1999)], the average coverage for one person injured in an accident is approximately $75,000; for two or more, it would be $150,00. While “75/150” would be the average coverage, insurers do not actually sell insurance in those particular amounts.

[xxxii] Lehmann study, supra, note ix, at 15.

[xxxiii] Auto Injury study, supra, note x, at 109.

[xxxiv] Ibid., at 111.

[xxxv] JEC 2003 study, supra, note xviii, at 4.

[xxxvi] Idem.

[xxxvii] Idem.

[xxxviii] 145 Cong. Rec. S3920 (daily edition April 20, 1999).

[xxxix] Stephen Carroll et al, The Cost of Excess Medical Claims for Automobile Passenger Injuries (RAND Institute for Civil Justice, 1995), 23; Insurance Research Council, Fraud and Buildup in Auto Injury Claims: Pushing the Limits of the Auto Insurance System (1996), 1 [hereinafter “IRC Fraud and Buildup study”].

[xl] IRC Fraud and Buildup study, supra, note xxxix, at 20.

[xli] See discussion, supra, at note xxxi.

[xlii] Jane has a theoretical right to sue Dick for his personal assets, but IRC data show that individuals almost never pay for auto accident losses out of their own pockets. The data show that at-fault drivers personally make only five percent of all payments for losses incurred by individuals in auto accidents. In reality, people settle for the “policy limits” of the other driver’s auto insurance. Insurance Research Council, Paying for Auto Injuries: A Consumer Panel Survey of Auto Accident Victims (1999 edition), 37.

[xliii] Jill may also recover $5,000 from her MedPay coverage but typically her insurer has a subrogation claim against the other driver for that amount so it does not affect her net recovery of $50,000.

[xliv] Jane would not be able to utilize her Underinsured Motorist (UIM) coverage to increase her recovery because it pays only if the amount is higher than the defendant’s bodily injury coverage and here both drivers carry the same “75/150” amount of coverage.

[xlv] The IRC has found that 19 percent of insured motorists nationally carry in excess of $100,000 of bodily injury liability coverage. When that figure is discounted for the estimated 14 percent of motorists who are uninsured (see the discussion, supra, note xxxi), the odds that one will be injured by a person with more than $100,000 in coverage fall to only 16 percent. Auto Injury study, supra, note x, at 24.

[xlvi] Analysis by Bishop & Associates using data from the National Foundation for Trauma Care’s 2002 U. S. Trauma Center Economic Study (2003) and information provided by participating Colorado hospital trauma centers (analysis forthcoming, 2004). There will be some additional payments as more tort claims and lawsuits are resolved but they will be limited, as Bishop & Associates has found that, in other tort states, tort payments average only five percent of the cost of trauma care.

[xlvii] JEC 2003 study, supra, note xviii, at 12.

[xlviii] Stephen Carroll and Alan Abrahamse, The Effects of a Choice Automobile Insurance Plan on Insurance Costs and Compensation: An Analysis Based on 1997 Data (RAND Institute for Civil Justice, 2000), 22. The estimate is drawn from RAND’s average savings for someone in a tort state who chooses to stay in the tort system, rather than the estimate for Colorado, because of Colorado’s subsequent reversion to the tort system.

[xlix] S. 625, The Auto Choice Reform Act: Hearing before the Senate Committee on Commerce, Science, and Transportation, 105^th Congress (1998), 6.

The Average Driver Will Save Little and

Colorado’s Emergency Care System Will Suffer

February 2004

Peter Kinzler

The Impact on Colorado Motorists and the Emergency Care System

And Recommendations to Improve Auto Insurance Coverage

Executive Summary

Colorado experience with no-fault insurance: What went wrong

Recommendations to improve Colorado’s auto insurance system

Premium savings for drivers who purchase only the mandatory coverage

While injured persons will find it more difficult to receive adequate and timely compensation for their economic losses, particularly in serious injury cases, attorneys will see their fees increase exponentially

Conclusion