How Michigan got — and kept — no-fault auto insurance

May 07--Detroit drivers face the highest average insurance rates for cars and other vehicles in the country, often more than $3,000 a year for a single automobile.

A Detroit Free Press investigation finds that runaway medical bills, disability benefits payouts and lawsuits under Michigan's one-of-a-kind, no-fault insurance system play a key role in driving up costs for drivers.

Find out what's behind the high cost of auto insurance in Detroit -- and what steps could be taken to help fix the problem.

Started in 1973, Michigan's no-fault insurance system was designed to lower costs and speed up payments to doctors by eliminating the need for accident victims to sue the other driver after a crash to get payment for injuries. Under no-fault, drivers make claims against their own insurance company, regardless of who is at fault in the crash.

Previously, motorists weren't required to buy insurance if they paid $45 a year into a fund for uninsured people. Michigan had been seeing tens of thousands of auto-related lawsuits a year -- and one-third of every dollar spent on insurance premiums went to legal expenses, according to state government reports.

Because lawmakers saw little need for people to go to court under the new system, they set high thresholds for negligence lawsuits. Negligence cases against the other driver in a crash now succeed only if someone is killed or suffers a serious bodily impairment.

No-fault insurance was a small nationwide trend in the early 1970s, and many predicted that the system would lower car insurance premiums -- but the opposite ultimately occurred.

The Michigan Supreme Court in 1978 upheld the no-fault law but said that if car insurance is mandatory, it must be available at "fair and equitable" prices. That ruling led to a territorial system that forbade insurers from charging rates that were less than 45% of the highest territory and imposed tighter rules for adjacent territories. But insurers argued the system forced non-city dwellers to pay higher rates to subsidize artificially low premiums in Detroit, where theft was higher.

The Michigan Catastrophic Claims Association was started in 1978 to pay for the most serious and expensive auto injuries through an annual per-vehicle fee that auto insurers pass on to consumers, currently $160 a year. The association pays insurance companies out of a fund once expenses surpass $545,000 for an injured person.

Nearly every effort since the 1980s to make far-reaching changes to the no-fault system has come up empty and often pitted insurance companies against the trial-lawyers bar.

In 1992 and 1994, voters statewide rejected ballot issues that would have limited no-fault's medical coverage.

Then-Gov. John Engler ended the territorial rating system in 1996. Once those restrictions lifted, insurers began assigning ratings by ZIP code, a practice upheld by the state Supreme Court.

Detroit attorney Michael Cafferty said the type of lawsuit known as a first-party suit, in which plaintiffs sue their own insurance company for benefits, was relatively uncommon in the 1980s when he started practicing law.

But as various tort reform efforts and state Supreme Court decisions made personal-injury cases harder to win in Michigan, lawyers gave first-party auto lawsuits a closer look, he said.

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"As these other things fell by the wayside, lawyers started thinking, 'Well, the PIP is fairly easy. You don't have to prove any threshold or prove fault -- all you have to prove is (that) the person was hurt in an auto accident and needed care and treatment,'" Cafferty said, using the PIP acronym for the "personal injury protection" medical, wage-replacement and in-home benefits available under no-fault insurance.

Lawyers in first-party cases can get 33% of the medical billings and benefits payouts in the settlements with insurers. Lawyers who regularly represent medical providers in such cases may agree to lower amounts, such as 20% of what a clinic or hospital recovers.

Efforts at no-fault reform fall short

Efforts in the state Legislature to make changes to no-fault insurance have come up short. Recurring proposals have set maximum fees that medical providers can charge and allowed policyholders to chose among different levels of no-fault coverage besides unlimited.

Defenders of the current system include the powerful Coalition Protecting Auto No-Fault, made up of trial lawyers, medical clinics, disability advocates and, until recently, the state's hospital lobby. Committee hearings on no-fault bills are often packed with people in wheelchairs who were catastrophically injured in car crashes and rely on no-fault benefits.

State Sen. Steve Bieda, D-Warren, who supports keeping unlimited benefits, said he thinks that past legislative pushes to rein in the no-fault system's costs failed because they attempted too many big changes at once. A better approach might be tackling specific issues, such as the absence of a no-fault fraud authority, he said.

"I think one of the biggest problems is we saw attempts that, instead of going for incremental savings and reforms, they always seem to be this massive overhaul," Bieda said.

Another reason reform proposals usually fail is because people generally like having full no-fault coverage in their auto insurance, although they want to pay less for it.

"That just seems to be a common human thing," Bieda said. "I want to pay less, but don't cut my coverage."

House speaker Tom Leonard, R-Dewitt, said last month that costly auto insurance is one of the biggest issues facing Michigan and attributed the problem to high no-fault insurance reimbursement going to hospitals and other medical providers. He said members of the House Insurance Committee are working on legislation to address that underlying problem. Their proposal could emerge in the coming weeks.

"The reimbursement rates are so high, that is what we have to tackle," he said.

State Sen. Morris Hood III, D-Detroit, who favors keeping unlimited no-fault benefits, introduced legislation this spring that would streamline the factors auto insurers can use for calculating premiums. His bill would allow insurers to base rates only on potential vehicle repair costs and the driver's history of insurance claims and civil infractions.

"Under the current law, insurance companies can base their rates on many subjective criteria that yield unfair outcomes," Hood said.

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