No-Fault Insurance: A Classic Example of Unintended Consequences

RAND Review News for Spring 2010

Although no-fault insurance was intended to lower the costs of compensating people involved in car accidents by taking most of these cases out of the court system, no-fault insurance has actually increased those costs because of rising medical claims, according to a RAND study.

In the 1970s, many policymakers and analysts believed that no-fault automobile insurance — in which an automobile accident victim seeks recovery from his or her own insurer instead of from another driver — would be a superior recourse that would displace conventional, tort-based automobile insurance policies and reduce insurance costs. Between 1970 and 1977, 27 states enacted no-fault laws, and no-fault had the support of some insurers, consumer groups, and academics.

No-fault insurance . . . has not reduced premium costs.

Drawing on 20 years of data that allow comparisons of different insurance regimes across states, RAND researchers have compiled the most comprehensive retrospective of the U.S. experience with no-fault insurance to date. The study finds that the main reason no-fault insurance declined in popularity is that it has not reduced premium costs. The figure shows that premiums have been consistently higher in no-fault states since 1986, and the gap has widened over time. By 2004, premiums under no-fault were 50 percent higher than those under the tort system.

From 1986 to 2004, Premium Costs for No-Fault Insurance Were Consistently Higher Than for Tort Insurance

From 1986 to 2004, Premium Costs for No-Fault Insurance Were Consistently Higher Than for Tort Insurance
SOURCE: The U.S. Experience with No-Fault Automobile Insurance: A Retrospective, 2010.

“While no-fault insurance was intended to offer less-expensive resolution of injury-related claims, it hasn’t,” said James Anderson, the study’s lead author and a RAND behavioral scientist. “No-fault insurance is a classic example of unintended consequences.”

The cost increases have been driven primarily by high medical costs. The costs of medical treatment covered by auto insurance in no-fault states have become much higher than in the other states because claimants in no-fault states have grown more likely than claimants elsewhere both to claim the use of more types of medical providers, from emergency rooms to chiropractors, and to visit each type of provider more often. There is also evidence of greater medical cost inflation in no-fault states.

Despite waning support for no-fault insurance, there are few signs it will be repealed in most states where it still exists. In some states, there is consumer support for a modified form of no-fault — “choice” — that lets consumers forgo their right to sue other drivers in exchange for lower premiums.

“Further research is needed to determine exactly why medical costs grew so dramatically under no-fault insurance and to evaluate reforms introduced in no-fault states to control the growth of medical costs,” Anderson concluded. square

For more information:

The U.S. Experience with No-Fault Automobile Insurance: A Retrospective, RAND/MG-860-ICJ, ISBN 978-0-8330-4916-2, 2010.