A car insurance crisis is spreading like a brushfire across several U.S. states. What's to blame? Flawed no-fault auto insurance systems, industry experts say.

Critics say no-fault insurance is at the root of several insurance problems:

*No-fault insurance is blamed for widespread car insurance fraud in Florida that has caused some insurers to reduce their business there.

*Industry officials say New York's broken no-fault insurance system will soon be beyond repair without comprehensive reform.

*In Michigan, no-fault insurance is blamed for ballooning personal injury protection claims that have put car insurance premiums out of reach for many city dwellers.

Twelve states and Puerto Rico have no-fault auto insurance laws. Under these laws, policyholders recover expenses for car accident injuries from their own insurance companies regardless of who was at fault for the accident. They also are prevented from suing for pain and suffering unless their injuries meet a certain threshold of severity.

States adopted no-fault laws so car accident victims could get prompt payment for medical treatment without having to wait for a determination of who was at fault for the accident. The laws were also supposed to stop ambulance-chasing attorneys from clogging the court system with small-claims cases.

But the laws have had unintended consequences. Fraud, rising medical fees, generous benefits and a growing number of lawsuits are all driving up costs in some no-fault states.

4 states in the spotlight

Insurance Information Institute (III) spokesman Michael Barry says problems with no-fault insurance have been in the spotlight in four states: Florida, New York, Michigan and New Jersey.

Drivers in no-fault states are required to buy personal injury protection (PIP) insurance, which covers their medical expenses - and those of passengers - up to a certain level. The amount and terms of coverage vary by state.

For example, Florida's PIP insurance provides up to $10,000 in coverage for medical expenses.

States with no-fault insurance
Florida
Hawaii
Kansas
Kentucky
Massachusetts
Michigan
Minnesota
New Jersey
New York
North Dakota
Pennsylvania
Utah

"It was a humanitarian approach to allow people who did not have health insurance to get treatment," says Walter Dartland, executive director of the Consumer Federation of the Southeast and a former deputy attorney general in Florida.

However, requiring drivers to purchase PIP had a negative unintended consequence, Dartland says. 

"It created a pool of billions of dollars to be taken advantage of at $10,000 a shot," he says.

As a result, Florida now is the nation's staged-accident capital. Crime rings smuggle people into the country and have them work off their debt by participating in staged accidents.

Ron Poindexter, a National Insurance Crime Bureau director in Florida, says. "Where there's money, there's theft. Where there are millions of dollars, there's organized crime."

Crooks in Florida work with dishonest medical professionals to operate sham clinics and file thousands of phony or inflated claims. Loopholes in Florida regulations make it easy to open clinics, Poindexter says.

"Some of these places are no more than voodoo medicine shops," he says. He characterizes them as "billing factories" and says, "There's no medical treatment going on."

Under Florida law, insurers must pay within 30 days after a claim is filed. Otherwise, accident "victims" or healthcare providers can sue.

Last year, insurers referred 2,779 suspected staged accident claims in Florida to the National Insurance Crime Bureau, a 119% increase from 2008.

Car insurance fraud costs Florida's no-fault auto insurance system around $1 billion a year, and a typical two-car family pays almost $100 a year in what amounts to a "fraud tax," according to the Insurance Information Institute.

Insurance fraud rots the Big Apple

Car insurance fraud is careening out of control in New York, too. More than one-third of no-fault auto insurance claims closed in the New York City area last fall appeared to be inflated or contain elements of fraud, according to a recent study by the Insurance Research Council.

Researchers found elements of fraud in 22% of the area's car insurance personal injury protection claims and evidence of over-billing or excessive use of medical services in another 14% of claims.

Almost half of the no-fault claims in New York result in litigation, according to III. No-fault claims are so prevalent that New York City had to create a division to handle them all.

Generosity of PIP benefits is driving up costs in Michigan, the only state that offers unlimited medical treatment under its PIP coverage. That means PIP will cover medical bills for drivers seriously injured in accidents who require treatment for the rest of their lives. 

A study by the RAND Institute for Civil Justice found that the average auto accident injury claim is 57% higher in Michigan than elsewhere. The study also found that while PIP costs remained stable overall in the rest of the country, they rose 96% in Michigan from 2000 to 2006.

Detroit is the most expensive city in the country for car insurance, with an average annual premium of $5,948 in 2010, according to the Insurance Information Institute. That's 56% higher than the second most expensive city, New Orleans, where the average annual premium in 2010 was $3,802.

No-fault insurance reform

As a result of the problems surrounding no-fault insurance, the insurance industry is pressing for reform.

New Jersey adopted a fee schedule that limits the amount insurers have to pay for common medical treatments associated with car accidents. The Medical Society of New Jersey sued, but the state Supreme Court ruled in November the fee schedule could be implemented.Similar proposals have been discussed in other states.

A Michigan proposal would let consumers choose cheaper policies that provide less coverage for medical treatment. Currently, Michigan residents must buy PIP insurance that provides unlimited coverage for injuries from car accidents. A Detroit state senator is drafting a bill that would make the city a test market for stripped-down policies, which would likely be available to low-income drivers and feature PIP limits of $50,000 or $100,000. The changes could save drivers 15% to 45% on premiums, according to a study commissioned by the Insurance Institute of Michigan.

New York Superintendent of Insurance James Wrynn proposed requiring people who file PIP claims to prove their treatments were medically necessary. He also wants to make it easier for insurers to suspend payments to clinics that are under investigation. Finally, he wants to change the rule that forces insurers to pay a claim if they haven't denied it within 30 days.

The Sunshine Alliance to Erase Fraud, a statewide group of consumer advocates, insurers and government agencies, is pushing for reform in Florida. Proposed reforms include increased funding for investigating fraud, closing loopholes in clinic licensing laws, stronger penalties for insurance fraud and premium discounts for people who choose preferred medical providers.

Dartland, who co-chairs the alliance, says he's disappointed lawmakers did not pass no-fault reform in this year's legislative session.

"It's very frustrating," he says. "Now the question is how to regroup."

Rather than supporting reform, he says, some insurers may push instead to end no-fault personal injury protection coverage in Florida, period.

The original article can be found at Insurance.com:
Why does everyone hate no-fault car insurance?