Floridians may have to pay higher auto premiums -- and health premiums -- if a state law mandating no-fault auto insurance is allowed to expire next month.

Insurers say switching to a tort system, in which the driver at fault in an accident pays, can only benefit consumers because there will be fewer fraudulent claims, lowering costs. But consumers and health care providers are concerned that the savings won't necessarily be passed along to policyholders. And even if auto premiums do fall, this may not offset the reductions in coverage or the cost of any additional auto or health coverage they may need.

Under the current system, policyholders involved in accidents are reimbursed for any damage to their vehicles and any medical expenses -- regardless of who is at fault. They are required to purchase at least $10,000 of a type of coverage called personal injury protection (PIP), which pays for medical treatment, rehabilitation, lost wages and even a funeral service.

By comparison, in a tort system, the driver at fault is responsible for paying the other party's medical expenses as well as for compensating them for loss of wages and "pain and suffering." Currently there are 38 states -- including Colorado, which had its no-fault system repealed in July of 2003 -- that operate under a tort system.

Besides Florida, Michigan, New York, New Jersey, Pennsylvania, Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota, Utah and Puerto Rico mandate no-fault auto insurance.

The no-fault system has obvious benefits for policyholders: They don't have to wait for a determination of who was at fault (and whose insurance company is going to pay) to be reimbursed. Unfortunately the system has been badly abused in Florida. Fraudsters stage deliberate "accidents" in which the injured "victims" are referred to participating medical clinics that pile on unnecessary claims.

The Insurance Information Institute points out that the Florida system is particularly prone to abuse because it doesn't limit reimbursements to doctors and hospitals. It says fraudulent claims have been a major driver of rising auto premiums in the state.

The Florida Department of Financial Services says 370 phony accident victims have been arrested since 1999. It puts the cost of fraudulent claims to residents at as much as $250 per family annually.

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Moving to a tort system will undoubtedly cut down on fraudulent claims, and insurers say they will pass this savings on to consumers. State Farm, the largest auto insurer in Florida, says it will reduce average rates by as much as 16% once the current law expires.

But a study conducted by Pinnacle Actuarial Resources in March of this year estimates that $55.72 million of the $1.36 billion of total PIP medical claims expected to be submitted next year would no longer be reimbursed by auto insurers under a tort system. It says that only an estimated 16.4% of this would be covered by health insurers, leaving emergency medical systems, doctors, hospitals and injured drivers on the hook for the rest.

The cost of the additional auto or health coverage required to plug this gap would vary from $31.94 to $79.85 a year, depending on the type of plan purchased.

Currently some 40% of Florida drivers rely on PIP to pay for medical costs related to car incidents. If the state reverts to a tort system, these drivers will have to purchase some other kind of coverage, pay for it out of pocket or stick doctors and hospitals with the bill. The types of coverage available include:

  • Bodily Injury: This covers you if you cause an accident that injurs or kills someone. The amount of coverage recommended by most insurance companies is $100,000 per person and $300,000 per occurrence. In Florida, this coverage is required and has a minimum limit of $30,000 per person. Since the repeal of no-fault insurance in Colorado two years ago, the cost of bodily injury premiums has increased over 53%, while on a nationwide basis it has remained relatively flat. According to Pinnacle's study, it would be difficult to extrapolate a commensurate increase in premiums in Florida because the two states' law and regulations are so different.
  • Medical Payment Coverage: This pays for reasonable expenses you and your passengers incur, regardless of fault. According to National Association of Insurance Commissioner data for tort states, 75% of insured drivers purchase this coverage.
  • Uninsured Motorists Coverage: This pays your expenses when you are hit by a driver who has no insurance. According to the Pinnacle study, some 20% of drivers in Florida are uninsured. (Truly, the Sunshine State!)
  • Health Insurance: Lastly, health insurance provides medical coverage for injured parties who have no coverage under their auto insurance. According to the U.S. Census Bureau, 80% of Florida residents had health insurance in 2005.

Not surprisingly, health providers are concerned about the move to a tort system. There were an estimated 250,000 car crashes in the state last year. The Florida Hospital Association says moving to a tort system could cost members over $100 million in services that aren't reimbursed.

Health insurers are worried, too. Blue Cross and Blue Shield of Florida estimates health insurance premiums could increase by $336 a year for a family of four under a tort system.

Even if the experience of other states moving from a no-fault system to a tort system has been positive, there's reason to be concerned about making the transition in Florida. The state is densely populated and there is very little public transportation.

Melanie Dufour joined TSC Ratings as a life and health insurance analyst in February 2007. She has an actuarial background with a BS degree in Actuarial Mathematics and Finance from Concordia University in Montreal, QC. Melanie has most recently worked as an actuarial analyst with Aequicap Insurance Company in Ft. Lauderdale, FL and prior to that as a senior analyst with Watson Wyatt Worldwide in Montreal, QC.