Citation: 70 Mich. B.J Content downloaded/printed from HeinOnline ( Mon Nov 1 14:42:

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1 Citation: 70 Mich. B.J Content downloaded/printed from HeinOnline ( Mon Nov 1 14:42: Your use of this HeinOnline PDF indicates your acceptance of HeinOnline's Terms and Conditions of the license agreement available at -- The search text of this PDF is generated from uncorrected OCR text. -- To obtain permission to use this article beyond the scope of your HeinOnline license, please use: &operation=go&searchtype=0 &lastsearch=simple&all=on&titleorstdno=

2 Michigan's No-Fault Auto Law: Too Much of a Good Thing?- And a Way for Some to Cut Back By Jeffrey O'Connell ichigan is generally conceded to have America's best no-fault law. 1 It certainly provides the most generous no-fault benefits-unlimited medical expenses and wage loss for three years, currently up to $32,000 per year as adjusted annually for inflation. 2 It has also generally been thought that the law was "in balance," meaning that the degree to which tort claims are eliminated by the "tort threshold," is generally commensurate with the level of benefits provided: Under Michigan's law, one cannot sue another motorist in tort unless the accident victim suffers death, serious impairment of body function, or permanent serious disfigurement. 3 But despite the accolades generally (and justifiably) accorded Michigan's no-fault law, problems have presented themselves. Before discussing-and suggesting some means of alleviating-them, such problems must be kept in perspective. Michigan is arguably much better off under its no-fault law-problems and all-than it would have been otherwise. On the whole many more people are paid more generously than they used to be under a tort regime unchanged by no-fault. 4 And even with the law's very generous no-fault benefits, auto insurance premiums are arguably substantially lower than they would be had the no-fault law not been enacted-by about 30% according to one calculation. 5 Granting all that, the law needs amending. As to the benefit level, providing unlimited medical benefits turns out to be very expensive, especially if it is combined with very generous wage loss benefits. No other state begins to match Michigan in both categories. Most states provide benefits at the level But despite the accolades generally (and justifiably) accorded Michigan's no-fault law, problems have presented themselves. of $10,000 to $20,000 for both medical and wage loss. 6 New York is unusual in providing even $50,000, covering both medical expenses and wage loss 7 New Jersey used to provide unlimited medical benefits but only $5,200 in wage loss; recent amendments limit the required medical expenses to $250,000.8 Even with those extraordinary generous benefits, Michigan's premium cost in 1987 was not only $28 below the national average, but the growth in cost from was also less than the national average (49% v 56%). 9 On the other hand the burden of covering unlimited medical costs led to the establishment of the Michigan Catastrophic Claim Association (MCCA) to pay medical costs above $250,000. Thanks to the Association, any insurer in any case need only face a maximum payment of $250,000 for medical loss, with the remainder distributed among all insurers doing business in the state via the fund, MCCA with a surcharge to fund MCCA against insurers doing business in the state on the basis of their premium volume. The annual assessment for each insured car has grown from only $12 in 1985 to $20 in 1987, $32 in 1988, $44 in 1989, and $66.64 in Total annual assessments increased from $57.5 million in 1985 to $200 million in 1988, but even so the deficit of the MCCA has been estimated at $300- $500 million as of the end of What these figures-and the general costs of no-fault benefits-illustrate is how expensive a system of unlimited medical benefits can be. The time has come to ask whether one can MKJHIUAN BAR JOURNAL~EVILMbLK P991 MICHIGAN BAR SEPT EMBER 1991 HeinOnline Mich. B.J

3 realistically require all Michigan motorists-especially the poor in the inner city and elsewhere-to pay for such relatively lavish benefits." After all, the poor do not carry such unlimited private coverage-or often any coverage at all-for other insurance needs, such as health or disability insurance. The result has been massive numbers of uninsured motorists-especially in the inner city. 12 ut even if one were to substantially reduce the required limits of no-fault coverage, problems of cost would still remain, caused by the cost of those tort claims that are preserved above the threshold. Most observers have long contested that socalled "verbal thresholds" like Michigan's, consisting of enumerated criteria for the preservation of tort claims by verbally designated categories, e.g. "serious impairment of body function," are less easily breached than so-called "numerical thresholds,' e.g. if medical bills exceed $1, But even verbal thresholds pose actuarial threats, especially if, as in Michigan, the courts tend to loosen their rigor by relatively generous interpretation. In 1982 in Cassidy v McGovern, 14 the Michigan Supreme Court held that whether there was a serious impairment of body function was a question of law for the judge so long as there was no material, factual dispute concerning the extent of the injury. In addition, the court held that an injury, in order to exceed the threshold, had to be "objectively manifested," as well as "subject to medical measurement" and had to interfere with a person's "general ability to lead a normal life." Four years later, however, in 1986, in Di- Franco v Pickard, 15 the court held that whether an injury constituted a serious impairment of body function was a jury question. In addition, the Court rejected the criteria of requiring injuries to be "objectively manifested" interfering with a "general ability to lead a normal life." The result of the Di- Franco decision arguably has been to SEPIEMI3EI( SEPT'EMBER 1991MICHIGAN The time has come to ask whether one can realistically require all Michigan motoristsespecially the poor in the inner city and elsewhere-to pay for such relatively lavish benefits. dramatically increase the likelihood of tort litigation under Michigan's nofault law. 16 But even in New York, with its threshold similar to Michigan's but not generally undermined by such judicial expansion, the cost of tort liability for the relatively few tort claims that are preserved dwarfs the cost of even $50,000 in no-fault benefits. New York's threshold banishes about 85% of all tort suits for bodily injury, and yet tort claims still lead to about twothirds of the pure premium 17 for bodily injury coverage (64%) with no-fault constituting only 36%.18 The explanation is arguably this: Under a tort system without a no-fault element, traffic victims often have no or few funds to cover accumulating medical expenses and lost wages while their cases are litigated. Thus, claimants often are forced to settle for relatively little rather than undergo the delay and uncertainty of ultimate resolution of the full value of a tort claim. But with a tort system buttressed by no-fault benefits (along with increased coverage of health care costs by Medicare and Medicaid, as well as private insurance), victims have a guarantee of resources that enables them to energetically pursue a tort claim, along with hiring a lawyer on a contingent fee at no initial cost. The result is much higher costs for the tort claims that are left under no-fault laws. 19 Even in Michigan, with its much higher nofault benefits, tort costs for claims above the threshold contributed about one third of the pure premium 20 of bodily injury costs. 21 Thus, if it is expensive to provide very high no-fault benefits, as Michigan does, it is doubly so if one also preserves full scale tort claims for serious injuries, however rigorously defined or interpreted. BAR JOURNAL MICHIGAN BAR JOURNAL HeinOnline Mich. B.J A solution therefore to Michigan's dilemma would be to reduce the level of required no-fault benefits, while also eliminating the right to assert claims in tort for pain and suffering above the threshold. Admittedly, such reform will lessen compensation for serious injury cases but if motorists were to choose no-fault benefits at even $250,000 (not to mention $500,000, $1,000,000 or $2,000,000), all but the most catastrophic of injuries would be covered. 22 And one must keep in mind that tort coverage itself is so expensive that the most that has ever been required under Michigan's law is only $20,000-even before the enactment of no-fault insurance. So it ill behooves those who urge the merits of the tort system to complain about compulsory coverage at a level of "only" $250,000, especially in automatic benefits severed from the vicissitudes of proving a tort claim. urthermore, how much sense does it make to require insurance at levels such that so many people in the inner city and elsewhere must violate the law because they cannot afford the mandated insurance levels? 23 It's as though we would require everyone to buy a Cadillac if they buy a car, even though they can only afford-and would be well served by buying-a Chevrolet. Admittedly, however, the power of the trial bar is such that achieving the legislative changes just proposed is unlikely. With this political reality in mind-along with preserving the right to claim or "assert claims for" tort damages for those who wish to retain such rights-robert Joost and I proposed a choice system allowing motorists to decide whether and at what level they

4 wish no-fault benefits, as opposed to tort rights, and as opposed to no-fault benefits supplemented by tort rights. 24 Thus, I propose that Michigan's law be amended in the following manner. Motorists will have three choices: 1. They can choose the present system. 2. Under an option called "optional personal protection insurance" or "OPIP;' they can choose the present level of no-fault benefits but to eliminate rights to sue, and be sued for, special damages for pain and suffering even if their injuries exceed Michigan's tort threshold. 3. Under an option called "limited optional personal protection insurance" (LOPIP), they can choose no-fault benefits with limits of either $250,000, $500,000, $1,000,000, or $2,000,000 with the proviso, as under the option immediately above, of an elimination of rights to sue, and be sued, for tort damages, for special damages, for pain and suffering. n an accident between two motorists who have opted for the present system, there is no change in current law: No-fault benefits are paid as they would be today and rights to assert claims-and be subject to claims-in tort for pain and suffering for injuries which exceed the threshold definition are also preserved. In an accident between motorists who have elected either OPIP or LOPIP, each will receive no-fault benefits (with the selected limits applicable to a LOPIP insured). Neither, however, can sue, or be sued, for special damages irrespective of the severity of the injury. On the other hand, the OPIP and LOPIP insureds will retain their rights to assert claims for special damages on the basis of fault if the other driver intentionally caused the accident and, in any case of either intentional or negligent conduct, for economic losses above amounts of no-fault benefits paid or payable. A key provision must be formulated, however, for accidents between motorists electing the present systeem and those electing either OPIP or LOPIP: The latter two categories undler this proposal will be precluded fron n claim- electing the current system. Similarly, motorists selecting the present system ing special damages against a nnotorist cannot assert a claim against ()PIP or LOPIP insureds for such damages. Int cover- stead, motorists electing presen age will assert claims against their own insurance companies under a coverage termed "inverse liability cover age" for general damages on the basis of who was at fault in the accident and to what degree. This "inverse liability co verage" is a variant of "uninsured motorist coverage" under which a traffic vicctim today asserts a claim against his or her Inm ity to opt for less than unlimited cov- erage would provide particularly high savings in urban areas for those most ove vulnerable to the affordability problem. 26 d. Added to the savings of limits on PIP Added to the saviniis of limits on PIP cover under this proposa l would be savings fro eliminating claims for general damages ab Michigan's threshol "ages most generous auto benefits of any state in the nation at comparatively low costs. But the value of continuing these mandatory benefits in their entirety needs to be carefully examined... The provision of unlimited medical, rehabilitation, and wage-loss benefits, without expense constraints and coverage exceptions, in the face of sharply escalating costs, may be doing Michigan's consumers a disservice. We need to examine whether mandatory unlimited benefits, forced upon consumers without options to reduce their premium costs, are justifiable and appropriate when insurance costs are ever-increasing. Personal Injury Protection (PIP) cov- erages at less than unlimited amounts would give consumers the opportunity to save a significant percentage of their annual premium bill...[and ejven $250,000 minimum would cover all but the most catastrophic of injuries... Savings from optional PIP coverages would be of particular benefit to lowincome consumers. Because... urban costs for dealing with catastrophic ac- cidents are particularly high, the abil- coverages under this proposal would be savings from eliminating claims own company if the other mottorist in the accident was uninsured. for general damages above Michigan's threshold. The result of this arrangem ent will be that the costs of "uninsured motor- The Michigan Senate continues: Report ist coverage" (which, as supplemented Both financially and philosophically, by inverse liability coverage, will in- expanding the options for consumer clude accidents with OPIP and LOPIP insureds) will increase. On the other choice can improve Michigan's no-fault auto insurance system. Drivers should hand, offsetting this increase will be have the opportunity to shape their ininsured lower liability costs for those under the present system in th, at those insured under OPIP or LOPIP will be surance coverage to better suit their particular economic needs. No-fault must remain responsive to the needs unable to assert liability claimss.25 of the consuming public. Availability, The closing remarks of the r enort of affordability, and fairness can all be the Michigan Senate's Commerce and Technology Committee Report on No- Mich- Fault Auto Insurance Reform irn igan include these words: Jeffrey O'Connell is The Samuel H. McCoy 11 Professor of Law, University of Virginia. He earned a B.A. from Dartmouth College, 1951 Michigan can be justifiably proud of and a J.D. from Harvard University, having provided its drivers with the MICHIGAN BAR JOURNAL SEPTEMBER 1991 MICHIGAN BAR JOURNAL SEPTEMBER 1991 HeinOnline Mich. B.J

5 -w enhanced by making Michigan's nofault system more open to consumer choice. 27 E Footnotes 1. Report on No-Fault Auto Insurance Reform in Michigan, [Michigan] Senate Commerce & Technology Committee 5 (April 1990) [hereafter cited as Senate Report]; but, as to all of North America, see O'Connell & Tenser, North America's Most Ambitious No-Fault Law: Quebec's Auto Insurance Act, 24 San Diego L. Rev. 917 (1987). The citation of Michigan's law is Mich. Com. Laws Ann (Supp. 1990). 2. Senate Report, supra note 1, at Mich. Com. Laws Ann (1); Senate Report, supra note 1, at Senate Report, supra note 1, at 5; O'Connell & Joost, Giving Motorists a Choice Between Fault and No-Fault Insurance, 72 Va. L. Rev. 61, 84 (1986). 5. O'Connell, No-Fault Auto Insurance: Back By Popular (Market) Demand? 26, San Diego L. Rev. 993, , citing Smith, Reexamining the Cost Benefit of No-Fault, Chartered Prop. & Casualty Underwriters J., Mar. 1989, at 28; Senate Report, supra note 1, at For a list of the states and their available no-fault benefits per victim, see O'Connell & Joost, supra note 4, at 64 n. 9, based on more extensive data found in U. S. Dep't of Transp., Compensating Auto Accident Victims: A Follow-Up Report on No-Fault Auto Insurance Experiences (1985) [hereafter cited as DOT Report] N.Y. Ins. Law (McKinney Supp. 19XX). 8. N. J. Stat. Ann. 39; 6 A 1 to 20 (19XX). 9. Senate Report, supra note 1, at Id. at Id. at Id. 13. O'Connell & Joost, supra note 4, at 66-67; DOT Report, supra note 6, at Mich. 104 (1982) Mich. 32 (1986). 16. Senate Report, supra note 1, at Pure premium is that portion of premium used to pay losses, thereby excluding an insurer's expenses in marketing and administration costs, as well as legal defense costs. 18. O'Connell, supra note This situation reminds one of the manner in which workers' compensation benefits similarly subsidize industrial accident victims who are allowed to bring product liability suits against third parties (other than their employers). Actually the subsidy is arguably much stronger under no-fault auto insurance laws because the accident victim doesn't find it necessary to seek a possible third party to sue but has the driver of the other vehicle readily available. O'Connell & Joost, supra note 4, at 71-72; O'Connell, Must Health and Disability Insurance Subsidize Wasteful Injury Suits? 41 Rutgers L Rev. 1055, 1061(1989). 20. See note 17 supra. 21. O'Connell, supra note Senate Report, supra note 1, at Id. at O'Connell & Joost, supra note The terms of a bill implementing this proposal are forthcoming in "Notre Dame Journal on Legislation," O'Connell, A Model Bill (Along With Commentary) Allowing Choice of Coverage Under Michigan's No-Fault Law. 26. Senate Report, supra note 1, at Id. at 31. blt'iliviblk SEPTEI:MBER 1991 U9~1 MICHKiAN BAR JOURNAL MICHIGAN BAR JOURNAL HeinOnline Mich. B.J