A No-Fault Proposal that Ranks Among the Best, and the Legislature Can’t Gut It

Many Californians are skeptical of Proposition 104, the “no-fault” automobile-insurance initiative, simply because it is sponsored by the insurance industry. Perhaps some history as to why the industry is supporting a no-fault law, along with a discussion of the “price” that it is exacting for doing so, may help to clarify things.

When I co-authored a book advancing the idea of no-fault auto insurance 22 years ago, I found the industry largely hostile to the idea. Gradually, however, some insurance companies came to recognize the merit of no-fault in paying their own insureds promptly for economic loss, regardless of who was at fault in the accident, and at the same time eliminating expensive shin-kicking litigation involved in establishing who was at fault and what was the cash value of non-cash losses--namely, “pain and suffering” (which often amount to exaggerated whiplash claims and the like).

With both consumer and industry support, many states passed no-fault laws between 1970 and 1975. Some of them were very good: New York’s, for example, provides $50,000 in no-fault benefits and eliminates fault-based (tort) claims unless an accident involves “serious or permanent” injury. But other no-fault laws, due to lobbying by trial lawyers, were very bad: In New Jersey, for example, no-fault provides unlimited medical benefits plus $5,200 in wage loss, but one can still file a tort claim if one incurs more than $200 in medical bills. Clearly this encourages “double-dipping”--people pursuing both no-fault and fault-based claims. And that gets very expensive--so expensive that Pennsylvania and Nevada repealed their no-fault laws.

Insurance companies, though more and more believing in the benefits of good no-fault laws for themselves and their customers, began to fear that if no-fault were pushed in other state legislatures, trial lawyers would succeed in passing laws like New Jersey’s instead of New York’s. After 1975, no new no-fault laws were passed.

Leap in time to 1988 in California: Responding to astronomically rising auto- insurance costs, Propositions 100 and 103 were initiated to drastically reduce insurance rates (without changing the underlying tort system responsible for rising premiums) as well as to greatly expand insurance regulation. Determined to avoid draconian price rollbacks and heightened regulation, the insurance industry came up with an alternative: no-fault. And the use of the initiative process meant that the insurance industry didn’t have to worry that the Legislature would gut a good no-fault proposal at the trial lawyers’ bidding. The bill would go up or down at the hands of the electorate.

Having drafted and reviewed countless no-fault proposals through the years, I can attest that the law that the insurance industry has come up with for California is a good one--one of the two or three best in the country. It is not as good as New York’s, but it is better than Florida’s. By providing $30,000 in no-fault benefits and eliminating tort suits unless an accident involves “serious and permanent” injury, it will cover the injury losses of about 90% of California’s accident victims and eliminate well over 90% of tort suits. Sure, it arguably may eliminate too many tort suits and it arguably may not have high enough no-fault benefits, but these are matters of relative detail. To reject Proposition 104 on the basis of such complaints is to make the best the enemy of the good.

How about the rest of Proposition 104--provisions preserving California’s relatively loose regulation of insurance premiums? Is that worth the price of a good no-fault law? Absolutely. New York had the best insurance regulations in the world, but, with the tort system attached, its auto insurance was an expensive mess--which is why it turned to no-fault. Massachusetts and New Jersey have tight insurance regulations, and, with bad no-fault insurance laws, their auto insurance is an even worse mess. To turn down a good (if admittedly not perfect) no-fault law to chase after untenable premium rollbacks and unworkable rate regulation would be for Californians to shoot themselves in the foot. And note that if Proposition 104 is rejected California will lose its chance to get a good no-fault law indefinitely. The insurance industry will not risk having its no-fault proposal gutted in the Legislature.

So do Californians distrust the insurance industry so much as to turn down a good no-fault law because the insurance industry is proposing it? Let’s face it: All the proponents of all the initiatives are acting in their own interests as well as, in their opinion, the public’s. Trial lawyers, in backing Proposition 100, want to preserve the tort system that serves them so well. The principal proponent of Proposition 101 insures mostly high-risk drivers, so greatly fears a no-fault law that would pay so many more of them; as a result, Proposition 101 retains the tort system with relatively minor changes. And it’s no coincidence that Propositions 100 and 103, backed by consumer advocates, guarantee numerous new well-paying jobs for consumer advocates. (And, whisper it, if no-fault passes I’ll gain in prestige and probably more speaking and consulting fees.)

So don’t necessarily expect a pure motive from any proponents of any initiatives. Look at them on their merits. In that way Proposition 104, with its good no-fault law, should win--and the others lose.