Driving Force:
The role of lawsuits in pushing up the cost of car insurance in New York State
Key findings of this look at auto insurance costs in New York:
- There's been a significant decline in serious auto accidents in New York State—yet a serious increase in auto insurance costs. Why?
- The answer is that accidents may be down, but lawsuits are up.
- The lawsuit industry adds an estimated $400 a year to the average cost of insuring a car in New York State.
- Lawyers now get 35 percent of all the money paid out in auto insurance claims—more than goes for medical care and wage replacement, combined.
- And a new law that was intended to improve insurance coverage has simply resulted in more lawsuits — and significantly higher costs for everyone.
By any standard, it's a lot safer to drive in New York than it used to be.
Air bags in newer cars, seatbelt laws, a crackdown on drunken driving and the aging-out of the baby boom generation are among the factors credited with bringing about a significant decline in serious accidents since the late 1980s.
Relative to miles traveled, the rate of personal injury accidents (including fatalities) has dropped steeply and steadily in New York State over the last decade. The numbers are down sharply in absolute terms, too, even though there are more cars on the roads than ever.
You wouldn't know it by looking at the cost of auto insurance, though. Between 1990 and 1996, the average auto insurance expenditure in New York rose by 36 percent as the Empire State became the nation's third most costly auto insurance market. Although the trend has recently begun to reverse, auto insurance rates in New York remain significantly higher than they were a decade ago.
What's going on here? Why did insurance premiums in New York go up when the number of accidents was going down?
The real problem
While some are quick to point the finger of blame at insurance companies, the facts unmistakably point to another culprit: New York's booming litigation industry and the trial lawyers who feed off it.
Despite the drop in accidentsand despite a "no-fault" insurance law expressly intended to minimize litigationthe number of personal injury lawsuits filed in New York State courts has nearly doubled since the late 1980s. The size as well as the frequency of liability claims has increased during the 1990s, according to insurance industry analysts.
Adding to an already growing liability burden, the Legislature approved an increase in the state's mandatory minimum auto insurance liability coverage in 1995. The very next year, motor vehicle liability suits jumped more than 10 percent and the average auto insurance premium in New York State rose 13 times faster than the national average.
Who benefits most from these trends? The answer, again, is lawyers. In New York State, more of the average auto insurance premium dollar goes to pay legal fees than to pay medical expenses, lost wages or "pain and suffering" damages for injured persons.
Who pays? Drivers. In fact, detailed insurance studies of a plan under which consumers could opt out of the lawsuit system shows that the plan would cut $400 a year off the average cost of auto insurance in New York State. Another way of putting that is to say: the lawsuit game is costing drivers an average of $400 a year.
The bigger picture
Increased auto insurance costs are a symptom of an even bigger problem—a liability system run amok. As documented by the Public Policy Institute in its March 1998 report, `An Accident and a Dream':
- Total liability costs in New York as of 1996, including auto liability coverage, added up to $14.3 billion. That's $787 per person28 percent above the national average. If you think of this as a "tort tax" (liability lawsuits are referred to as "torts" in the legal system), it's a tax that exceeds all state and local sales taxes combined, a tax that's more than double the total raised by all state business taxes.
- Plaintiffs' lawyers in New York State now make an estimated $2.3 billion a year from tort suits. And the big contingency fees generated by such cases have given lawyers the financial wherewithal to pour money into politics, in order to clear the way for still more litigation.
Table 1 Where the New York Auto Insurance Premium Dollar Goes ALL CLAIMS CENTS PER DOLLAR Payments to injured persons: Medical care 9 Wage loss & other economic payments 2 Pain & suffering, and other non-economic damages 7 Lawyers' fees 12 Other claim costs 3 TOTAL CLAIM COSTS 33 Source: Insurance Information Institute estimate based on data from A.M. Best Co., Insurance Services Office, Inc., National Association of Independent Insurers, and Insurance Research Council. Running counter to the trend elsewhere in the nation, tort filings in New York State jumped by 58 percent between 1988 and 1996. And the surge in motor vehicle-related claims was a major reason for the increase.
There is strong evidence that the growth of this lawsuit system is driven not by the needs of clients or the demands of justice, but by the growing
numbers and the growing appetite of the state's trial lawyers.
The number of lawyers actively practicing in New York grew by an astounding 40 percent in just the last ten yearseven as the state's total population barely grew at all. Compared to population, New York's cadre of lawyers is larger than all but two other states, and is 66 percent above the national average.
As this growing number of lawyers fights to find ways to make a living in a slow-growth economy, some of its members are turning to flamboyant advertising pitches. And motor vehicle cases are a very big part of the business. In Albany, for example, a billboard on a major arterial highway promotes a personal injury law firm with a single pointed question: "Car Accident?"
"No-fault"? No problem!
New York is one of 13 states with a no-fault auto insurance law designed to minimize litigation by ensuring the automatic reimbursement of property and personal injury damages arising from the vast majority of accidents.
Under New York's statute (Section 5101 of the Insurance Law), a driver's own auto insurance policy will cover up to $50,000 of economic lossesdefined to include both medical expenses and lost wages if he or she is injured in a car crash, regardless of who was at fault.
In exchange for this guarantee of coverage, policyholders are not allowed to sue another driver for damages except in cases of "serious injury." The law's definition of serious injury includes:
- Death, dismemberment, significant disfigurement, or a bone fracture.
- Loss of a fetus.
- Permanent loss of use of a body organ, member, function or system.
- Permanent consequential limitation of use of a body organ or member.
- Or significant limitation of use of a body function or system.
Serious injuries under the no-fault law also are defined to include "a medically determined injury or impairment of a nonpermanent nature which prevents the injured person from performing substantially all of the material acts which constitute such person's usual and customary daily activities for not less than ninety days during the one hundred eighty days immediately following the occurrence of the injury or impairment."
On the surface, the no-fault law's language sounds somewhat restrictive. But in recent years, plaintiff's lawyers have been exploiting more exceptions to the no-fault bar on tort suits.
For example, New York courts have found that a medical diagnosis of a "herniated, desiccated or bulging disk" resulting from a car crash can constitute grounds for a serious injury claim under the no-fault lawdespite recent medical research showing that two-thirds of the adult population have the same disk abnormalities with no back pain at all. Courts have also allowed auto accident lawsuits based on "serious injuries" as minor as a sprained ankle and scars on one knee.
Since the no-fault law itself has not changed since the late 1970s, the loosening of the serious injury standard would appear to be the most plausible explanation for a significant jump in motor vehicle tort suits between 1988 and 1996.
Similar trends have been seen throughout the country, according to insurance industry analysts. Since the late 1980s, auto insurers have noted a sharply increased number of difficult-to-verify "soft tissue" injury claims, such as sprains and strains, as opposed to bone and joint damage that shows up on Xrays and other tests. This has coincided with an increase in claims for chiropractic treatment, especially for sprains and strains. 1
What the statistics show
When the state began its present system of judicial record-keeping in 1988, torts made up 40 percent of new civil filings in Supreme Courta total of 53,104 cases out of 134,103 filed that year.
By 1997, the number of new tort filings had risen to 82,453a 55 percent increase in nine yearsand represented 45 percent of all new Supreme Court civil filings.
The rate of increase in tort filings is similarly high when expressed as a share of the state population, which rose only slightly during the same period. In 1988, there were 300 new tort filings per 100,000 residents in New York State; by 1997, the tort filing rate had risen to 460 per 100,000.
In the latest published comparison of state court systems, New York had the third highest tort filing rate in the nation. New York's rate of increase in tort filings per 100,000 residents was also the third highest in the country between 1990 and 1995a period that saw a net decrease in tort filings in other states, according to the study. 2
This rising tide of torts has flowed, to a great extent, from a shrinking pool of auto accidents. Motor vehicle tort filings in state Supreme Court increased from 22,108 in 1988 to 41,817 in 1997an 89 percent jump. Motor vehicle cases rose every year and accounted for nearly two-thirds of the increase in all tort filings in New York during that period.
Tort filings jumped by 11 percent in 1996the largest such increase in seven years. Perhaps not entirely by coincidence, the increase followed the Legislature's approval of increases in minimum liability coveragethe amount that must be paid out by the insurer of a driver who causes an accident.
Prior to the change, the minimum required liability coverage in New York was $10,000 for injuries to one person, $20,000 for injuries to two persons, and $5,000 for property damage. The bill raised the so-called 10/20/5 limits to $25,000, $50,000 and $10,000, respectively.
Trial lawyers led the push for the change, saying the $10,000 and $20,000 minimums had gone unchanged for decades and were insufficient to pay for losses in many cases. The existence of $50,000 in no-fault coverage for all injured drivers was seldom noted in discussions of the billwhich, in any event, passed with little debate at the end of the 1995 session.
For the 10 percent of New York drivers who can afford only minimum coverage, the new law meant especially steep premium increases. But the change also had a ripple effect ultimately felt by all drivers. Accidents that were of little interest to trial lawyers under the old limits now look more attractive, driving up settlement and loss costs paid by everyone. In 1996 , the average premium for liability coverage in New York State increased by 7.8 percent, compared to 0.6 percent for the nation as a whole.
Fewer accidents, but more lawsuits
The increase in liability claims and lawsuits would be understandable if matched by some equivalent increase in car crashesor, at the very least, in car accidents involving personal injuries. Instead, as shown in the graph on the back page, motor vehicle accident and tort filing rates have moved in precisely opposite directions.
The number of personal injury accidents in New York State decreased from 201,966 in 1988 to 184,014 in 1997—a drop of nearly 18,000 accidents during a period that saw 19,000 more lawsuits. The ratio of lawsuits to personal injury accidents more than doubled, from .11 to .23.
In other words, more than one out of every five personal injury accidents in New York State now results in a lawsuit, despite the existence of a no-fault insurance law designed to discourage litigation. And as the number of claims and lawsuits rises, so does their average size. Since 1990, the average bodily injury liability claim has risen by 33 percent, according to the Insurance Information Institute.
While comparable state court statistics are not available prior to 1988, an industry study indicates that increased motor vehicle litigation stems from a long-term trend of rising insurance claims for injuries in car crashes.
Between 1980 and 1995, the Insurance Research Council reported, the number of bodily injury claims per 100 automobile property damage claims in New York rose by 31.2 percent (from 11.5 to 15.1 per 100), and the average loss paid per claim rose by 187 percent (from $640 to $1,837).3
Impact on rates
The rise in tort filings also has coincided with a sharp increase in auto insurance costs in New York. As of 1990, when the Insurance Information Institute began reporting a consistent state-by-state measure of average auto insurance expenditures,4 New York ranked seventh in the nation with an average expenditure of about $706. That was 23 percent above the national average of $574.
By 1996, the latest year available, New York's average auto insurance expenditure had risen to fourth highest, at $96040 percent above the reported national average of $666. Hawaii was the only state to experience a larger increase in its average auto insurance expenditure during that period; only New Jersey and the District of Columbia had higher overall average auto insurance burdens in the latest rankings.
Injured victims actually receive only a small share of these insurance expenditures. As shown in Table 1, more of the premium dollar in New York flows to lawyers (including defense lawyers) than to medical payments, economic damages or non-economic damages.
Compared to national averages, 15 percent more of the auto insurance premium dollar in New York State goes to pay personal injury claims, while 20 percent less flows to property damage claims.5
The contingency fee factor
The manner in which lawyers are compensated for motor vehicle and other tort suits explains why lawyers in the personal injury field are uniquely willing, among all professionals, to invest heavily in expensive TV commercials and toll-free 24-hour hotlines to generate new business.
In contrast to drafting contracts, house closings, uncontested divorces and other common types of legal work, tort litigation offers plaintiff's lawyers a piece of the action. In New York, as in most states, trial lawyers are entitled to charge up to one-third of the damages they recover for their clients in most personal injury lawsuits. Apologists for the system defend these contingency fees as "the key to the courthouse door" for clients too poor to afford to pay hourly rates. However, as Professor Lester Brickman of Cardozo Law School points out, contingency fees are also "the key to untold riches" for lawyers.
In cases where liability is not contested, the effective rates of compensation for contingency fee lawyers can range from $1,000 all the way up to $35,000 per hour, Brickman has calculated.6 Moreover, lawyers often charge separate litigation expenses on top of their contingency fees.
Interestingly, New Yorkers' litigiousness in the tort arena does not extend to contract cases (for which lawyers are paid on an hourly basis). The filing rate for contract cases in the Empire State has dropped in recent years and is among the lowest in the country.
New approaches
In 1986, a bipartisan, blue-ribbon panel appointed to study the liability issue in New York concluded that the "compensatory thrust" of the tort system "has greatly expanded the number of claims the system must handle, increased the transaction costs that the parties must bear, and stretched the concept of fault to the breaking point."7
The cause has now been taken up by New Yorkers for Civil Justice Reform, a nonpartisan coalition of citizens, businesses, municipal governments and organizations representing hundreds of thousands of New Yorkers. It has drafted legislation that would rein in liability costs, including the non-economic damage awards and contingency fees that help drive up auto insurance costs.
In the long run, the greatest breakthrough in reducing auto liability costswithout shortchanging real victims or encouraging negligent conductmay come from a more fundamental overhaul of both tort law and lawyer compensation rules.
For example, proposed "early recovery" guidelines for tort cases would not alter the existing landscape of tort lawexcept to change the basis on which plaintiff's lawyers are compensated. The guidelines would encourage more low-cost settlements, in which the lion's share of financial benefits flow directly to the plaintiffs themselves while lawyers are compensated only for efforts actually expended.
A second new approach is exemplified by the "Auto Choice" plan, co-sponsored on the federal level by U.S. Sen. Daniel P. Moynihan of New York, which would give consumers the ability to opt out of the tort system entirely, in exchange for major savings in their insurance premiums.
All these approaches aim in the same direction, by de-emphasizing the role of lawyers and returning the power of real choice to consumers. Contractual relationships work well in defining other relationships in our economy; they could be given a chance to work in the area of liability.
1. John C. Connors and Sholom Feldblum, Personal Automobile: Cost Drivers, Pricing and Public Policy.
2. "Examining the Work of State Courts, 1995," Center for State Courts, p. 28.
3. Trends in Auto Injury Claims, 1996 Edition, Insurance Research Council, New York.
4. Intended to reflect what consumers actually spend on insurance for each vehicle, the average is calculated as total written premiums divided by liability car years.
5. Insurance Information Institute estimate based on data from A.M. Best Co., Insurance Services Office, Inc., National Association of Independent Insurers, and Insurance Research Council.
6. "Rethinking Contingency Fees," by Lester Brickman, Michael J. Horowitz and Jeffrey O'Connell, Manhattan Institute, 1994.
7. Insuring Our Future: Report of the Governor's Advisory Commission on Liability Insurance, Vol. II, July 1986, p. 191-192.
