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Finding fault with no-fault auto-insurance mandates

Opinion Editorial
August 27, 2002

By Reid Lusk

Im trying to prepare myself now so I wont become nauseous when my car insurance renewal notice arrives in October. Thats because the already high auto-insurance rates in Colorado are going even farther up. Its gotten to the point where some people can barely afford to drive, according to Carole Walker of Rocky Mountain Insurance Information Association. She says rate increases are averaging 15-20 percent, to double the national average. This is in a state that already has the 13th costliest auto insurance rates in the nation.

At the root of the problem is Colorados outmoded collection of insurance laws known as the “no-fault” system. More than 28 years ago, the system began with good intentions. At the time the courts overflowed with auto accident lawsuits that sought damages for medical costs from the driver at fault. With claims tied up in court, medical bills were slow to be paid and premiums increased to factor in legal fees. So now the state mandates that all drivers purchase at least $130,000 in Personal Injury Protection (PIP) coverage that automatically pays for a broad array of expenses related to an accident.

Everything from medical bills to lost wages and even housekeeping services are covered. A drivers own coverage pays for his own injuries, regardless of whos at fault. It sounds good on paper: limit costly lawsuits, lower insurance costs and facilitate the speedy payment of medical bills. But ironically, the reforms ended up exacerbating some of the same problems they sought to correct, while creating new ones.

Lawsuits havent really decreased thanks to a ridiculously low $2,500 threshold the 1974 legislature set for non-material damages. Anyone with $2,500 or more in medical costs (which is not hard to reach) can sue for “pain and suffering.” Surprisingly, even someone who breaks the law and drives without insurance retains this right. Insurance companies astutely point out that the pain and suffering clause encourages padded claims and excessive treatment that lead to higher costs for everyone. Its time to either raise the threshold significantly, or change it to describe “pain and suffering” specifically.

The term by itself is overly broad and open to abuse. Lawbreakers with no insurance should not have a right to sue for pain and suffering. While the threshold for lawsuits is too low, the mandated PIP coverage is far too high. Colorado has the second highest PIP coverage requirement in the nation. This requirement alone makes up a full third of an individuals auto insurance premium.

One wonders how the state can justify this exorbitant coverage mandate when other states do not require nearly as much. With medical insurance costs skyrocketing, both insurance companies and their customers are unfairly burdened by the mandating of such lavish coverage. The prohibitive costs also have pushed greater numbers of motorists to drive illegally without insurance. Industry estimates put the number of uninsured motorists at anywhere from 15-30 percent of vehicles on the road. As the number of uninsured motorists increases, so do premiums.

The real inequity is that theres hardly any consumer choice when it comes to auto insurance coverage. Theres no legitimate reason why Coloradoans shouldnt be allowed to choose their level of PIP coverage down to a reasonable minimum, as many states already allow. Most of us pay through the nose for insurance already, and dont need or want $130,000 in medical coverage tied to our auto policies. Additionally, Colorado drivers deserve better options for holding other drivers accountable. It hardly seems fair that safe drivers must pay huge sums for policies that cover injuries caused to themselves by negligent drivers.

The state legislature has failed to overhaul the flawed auto insurance system in Colorado for most of the last three decades. The first efforts at reform were blocked in the House earlier this year. One can only hope that when the legislature reconvenes, it will pass meaningful reforms that substantially reduce premiums and give better choices to consumers. The auto insurance system in our state is fast transforming from an expensive hassle to a consumer crisis.

Copyright 2003
The Independence Institute

INDEPENDENCE INSTITUTE is a non-profit, non-partisan Colorado think tank. It is governed by a statewide board of trustees and holds a 501(c)(3) tax exemption from the IRS. Its public policy research focuses on economic growth, education reform, local government effectiveness, and Constitutional rights.

JON CALDARA is President of the Institute.

REID LUSK is a researcher at the Institute.

ADDITIONAL RESOURCES on this subject can be found at:

NOTHING WRITTEN here is to be construed as necessarily representing the views of the Independence Institute or as an attempt to influence any election or legislative action.

PERMISSION TO REPRINT this paper in whole or in part is hereby granted provided full credit is given to the Independence Institute.