Tort v. No-Fault: Getting the best of both

The Colorado Auto Accident Reparations Act (“CAARA”), Colorado’s no-fault auto insurance law, went to be with Jesus on July 1, 2003. From that date forward we’ve been using the traditional tort system to resolve injury claims arising from motor vehicle collisions.

The editorial board of the Rocky Mountain News published this today. The editorial notes a recent study commissioned by the governor’s office showing that Colorado auto insurance rates have dropped thirty-five percent since CAARA’s repeal. The Rocky also notes that several bills pending before the state legislature would reintroduce certain provisions of the former no-fault system, and bill that has yet to be introduced would make full blown no-fault the law once again.

The Rocky opposes any whole or partial return to the no-fault system because of the auto insurance premium increases that would undoubtedly follow. I concur wholeheartedly, but it’s well worth noting that tort and no-fault are radically different systems. Although the balance favors the tort system, injury claimants in no-fault states enjoy protections and benefits that claimants in tort states do not.

Fortunately, we in tort states can get the best of both worlds by making some fairly simple changes to our own auto insurance coverage. That’s the primary thrust of this here entry.

Tort v. No-Fault:

A tort system is fault based, meaning that the driver whose negligence caused the collision is responsible for all the resulting damages. That includes damages to the innocent person’s car and the full panoply of personal injury damages, both economic (medical expenses, lost income, diminished earning capacity, etc.) and noneconomic (pain and suffering, changes in lifestyle, loss of ability to perform certain activities, etc.). Generally speaking, the policy goals that underlie the traditional tort system are: (1) providing the innocent with full compensation for injuries caused by others; and (2) holding tortfeasors accountable for all the harm they cause.

A no-fault system consists of legislation requiring drivers to purchase first-party no-fault coverage, often called personal injury protection (“PIP”) coverage. There are as many different no-fault statutory schemes as there are states which have them, but the basic thrust is that a person injured in a car crash gets his collision-related economic losses paid by his own insurance company, without regard to who was at fault in causing the crash. Under a “pure” no-fault approach, which so far as I can tell exists only in the wet dreams of auto insurance CEOs, all tort liability is abolished.

In practice, the abolition of tort liability has its limits. The injured person can’t recover from the at-fault driver economic damages paid or payable by his own insurer. However, the injured person can recover noneconomic damages from the tortfeasor if the injuries rise to a certain level of severity, often called a “threshold.”

Differences among no-fault systems center on the amount of first-party PIP benefits required and the severity of the threshold required to pursue a tort claim for noneconomic damages. I used to practice law out of an office very near the Ohio-Michigan border and thus had a fair amount of experience with Michigan’s no-fault law. Under that system, at least as it existed in 2003 when I moved the hell out of Ohio, the medical benefits an injured person could get under his PIP coverage were pretty much limitless and the wage loss benefits were relatively generous. The trade-off was that the threshold for tort recovery of noneconomic loss was fairly high, applying only to cases involving death, “serious impairment of body function” or “permanent serious disfigurement.” As you might imagine, proving “serious impairment” or “permanent serious disfigurement” was no easy task.

Under Colorado’s former no-fault system, PIP benefits weren’t as plentiful. PIP coverage for medical expenses, for instance, was capped at $100,000.[1] By contrast, the threshold for recovering noneconomic damages from the wasn’t as harsh. In addition to the Michigan criteria listed above, CAARA authorized tort recovery where the injured person’s reasonable and necessary collision-related medical expenses exceeded $2,500. It doesn’t take much of an injury to surpass that, health care expenses being what they are nowadays.

No-fault laws are generally premised on policies of: (1) insuring prompt payment of crash-related noneconomic losses; (2) reducing insurance premiums by lowering overall payouts; and (3) easing the burden that car crash litigation imposes on the courts.

Less-Than-Smooth Transition:

Most people in Colorado knew that a change was coming, but not all that many knew how big a change it really was. The general feeling was that once we transitioned from no-fault to tort, the at-fault driver’s insurance company was ultimately on the hook for the injured person’s medical expenses. That’s true, but it doesn’t work as many folks think it should.

Suppose you’re knocked unconscious in a car crash that isn’t your fault and get taken to the emergency room. ER personnel determine that you have a severe concussion and keep you for a couple of days. You eventually recover nicely with no permanent ill effects, but all that treatment costs money.

You start getting bills. The ambulance service, the hospital, the ER physician’s practice group, the radiologist, etc. all want paid. You say, “Hey, the crash wasn’t my fault. Send your bills to the other driver’s liability insurer.” Will that keep the creditors off your back?

Not just no, but hell no. Auto liability insurers almost never adopt a pay-as-incurred approach to handling third-party liability claims. They want to resolve claims all at once for a single lump sum, and there’s nothing to prevent them from doing so. In our hypothetical, the at-fault driver’s insurer can freely say, “You have two choices. We can pay the bills you’ve gotten to date right now, in which case you’ll have to sign a release giving up any further claims you might have against us and our insured. On the other hand, you can try to recover from us what you consider to be the full value of your claim, including all economic and noneconomic losses. That’s fine and dandy, but we’ll need a full and final release of all claims in that event too. What we won’t do is pay your bills as they’re incurred and keep your claim open.”

No big deal, right? Surely the health care providers will wait for payment until a final settlement of your claim against the other driver.

Why no, no they won’t. Your legal obligation to pay your health care providers is wholly independent from your claim against the at-fault driver and his insurance company. The providers won’t wait until you settle with or obtain a judgment against the other driver, and there’s no law requiring them to wait. They’re perfectly free to pursue any lawful debt collection avenue as soon as your account becomes delinquent.

So, then, your obligation to pay medical bills promptly isn’t altered by the fact that the bills arose from injuries sustained in a car crash caused by someone else’s negligence. If you want to avoid having your credit wrecked, you’ll need to submit those bills to your own health care insurer. If you’re one of the 47 million Americans without health coverage, you’ve got a real problem.

If you do have health coverage, you avoid the health care provider nonpayment issues discussed above. However, problems will arise down the road when you settle your claim against the at-fault driver thanks to . . .

Subrogation and Reimbursement:

Pretty much every insurance policy contains subrogation and reimbursement provisions that apply where some third party is legally liable for the insured’s injuries. A subrogation clause basically says that your insurance company, by paying medical benefits to which you’re entitled under your policy, buys a piece of your cause of action against the at-fault person. Thus, your insurance company can go to court and file a lawsuit against the tortfeasor to recover the benefits it paid on your behalf.

Very near the subrogation clause you’ll find a reimbursement provision, which typically says something like you “hold in trust” for your own insurance company the proceeds of any recovery from a third party tortfeasor, and agree to pay back your insurance company whatever benefits it paid you on account of the tort-related injury. Whereas the subrogation clause gives the your insurance company rights against the tortfeasor, the reimbursement provision gives the insurer rights against you, its humble insured.

Courts generally enforce subrogation/reimbursement clauses based on the rather infantile notion that “double recovery” is a bad thing. The “double recovery” argument is idiotic beyond description, but that’s a whole ‘nother blog entry.

Enforcing a subrogation right requires filing suit against the tortfeasor and spending money to prosecute that suit. Asserting a reimbursement right generally involves placing the injured person on notice of a claim then sitting back and waiting for the injured person to obtain a recovery from the tortfeasor. Guess which right the insurer usually chooses to enforce.

Problems arise when the at-fault driver has, say, $25,000 in liability coverage and you had, say, $30,000 in collision-related medical expenses that your health insurer paid. You settle for the other driver’s policy limits, and your own insurance company says that the whole settlement belongs to them. If that holds up, you get nothing at all from the at-fault driver.

State law may well provide relief from that awful result in the form of the common fund doctrine, which provides that your insurance company must bear at least some of the expense you incurred in recovering money from the tortfeasor, or the make-whole rule, under which your insurance company gets absolutely nothing by way of subrogation or reimbursement unless and until you receive “full compensation” from the at-fault driver.

Trouble is, most people who have health insurance coverage get it as part of an employee benefits plan. ERISA, an acronym for The Insurance Company Wins Every Fucking Time, governs such plans. State law doctrines such as make-whole and common fund don’t apply if the plan language unequivocally gives the insurance company first priority in the proceeds of the injured person’s recovery against a third-party tortfeasor. The tragic case of Deborah Shank and her dealings with the Wal*Mart employee benefits plan provides particularly ugly example. Wal*Mart won its court battle to take the entire third-party settlement of a brain damaged former employee, but recently dropped its demand for reimbursement faced with a shitstorm of controversy. I heartily applaud the outcome, of course, but most of us don’t have Keith Olbermann advocating on our behalf.

Things were simpler in the no-fault era. CAARA generally provided that PIP insurers had no subrogation/reimbursement interest in the proceeds of an auto collision victim’s tort recovery. That made eminent sense, seeing as how the tort recovery couldn’t include economic damages paid by the PIP carrier.

But no-fault was the law here for something like thirty years. As a result, even most personal injury attorneys in this state are n00bs when it comes to dealing with subrogation/reimbursement claims in the motor vehicle collision context.

Best of Both Worlds:

So how do we Coloradans take advantage of the enhanced third-party recovery available under the tort system while at the same time preserving the first-party medical expenses protection we had under CAARA? Colorado auto insurance agents — the good ones, at least — came up with an answer before the switchover took effect. They started advising their clients to purchased $100,000 in medical payments coverage. “Med pay” is like PIP coverage in some noteworthy respects. It’s first-party coverage that you buy from your own auto insurance company. It pays collision-related medical expenses up to the stated limit of your coverage. Moreover, it pays those expenses without regard to fault.

Many people carry little ($5,000 or less) or even no med pay coverage on their auto insurance policies. That’s a mistake. Having $100,000 in med pay coverage essentially places you in the same position you had under the old no-fault law: $100,000 of coverage for medical bills regardless of fault. And the premiums for med pay coverage tend to be much lower than the premiums for PIP coverage under the no-fault system. Thus, for less money than, you can get medical coverage under your own policy that pretty much duplicates what you got under CAARA. That will help insure that your collision-related medical expenses get paid quickly and thereby keep the health care providers’ collection agencies off your back.

But what if the crash and your resulting injuries were caused by another driver? Does your med pay insurer have a subrogation/reimbursement interest in the proceeds of your tort recovery?

Yes, but your auto insurer’s subrogation/reimbursement claim is governed by state law, not by ERISA. Med pay carriers are much more amenable to negotiating a reduction of the amount of their reimbursement claims. When they won’t negotiate, you’ve got sound state law arguments to make under the common fund and make-whole doctrines.

So do yourself a favor and take a look at the most recent declarations page of your auto policy. If you have little or no medical payments coverage, talk with your insurance agent about buying more. You may never need it, and I hope you don’t, but you’ll be happy to have the coverage in the event of a nasty crash with nasty injuries.

[1] Actually, it was $50,000 for medical expenses and $50,000 for “rehabilitation” expenses. By judicial decision, however, the rehabilitation coverage could be used to pay medical expenses where those expenses exceeded $50K. As a practical matter, then, you had $100K of medical benefits.

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