AIA Points Finger At New York's Trial Lawyers And High Medical Costs For Driving Up Auto Insurance Costs

N/At <%=company%> (AIA) report on New York auto insurance has found fundamental regional differences between upstate New York and the New York City Metropolitan area and concluded that the real factors responsible for driving up New York auto insurance costs are increased litigation and growing medical expenses in the New York City area.

The study found that New York City has failed to join in a national trend toward fewer injury claims, more reasonable medical claims expenses, less claim padding and reduced trial lawyer involvement in auto accidents.

In contrast, the state's no-fault system is working well in upstate New York, providing generous benefits to motorists at a reasonable cost and a number of upstate areas compare favorably with Michigan, often considered to have the best no-fault system in the country.

Responding to statements made by the New York Public Interest Research Group (NYPIRG), Mary Ciaccio Griffin, AIA assistant vice president, northeast region said, "NYPIRG's simplistic recommendations will not save New York consumers one red cent. When loss experience is closely examined, it is easy to see why the reduction in auto insurance rates in New York is less than in many other states, but the positive side of this issue is that there are clear cut, proven ways to attack this problem.

"Time and again when we look at auto insurance costs, we return to the fact that aggressive trial lawyers in the New York City area are eroding the provisions of our state's law to get relatively minor injury cases into the tort system," said Griffin. "This is a key factor in why consumers are forced to pay more."

The AIA study revealed that the average cost per insured vehicle for bodily injury liability in New York is 53 percent above the national average. Although New York's no-fault system features the fourth most generous auto injury compensation benefits in the nation and is designed to keep minor and hard-to-verify bodily injury claims out of the tort system, the continued efforts of trial lawyers, medical specialists and accident claimants who seek ways to build up injury claims has eroded the system. This buildup has led to higher liability awards, more fees going to trial lawyers and ever increasing payouts for unnecessary medical care.

According to the report, the frequency of bodily injury claims is also increasing in New York while declining elsewhere. Since 1987, bodily injury claim frequency has risen 39.3 percent in New York compared to only 12.5 percent countrywide. Having peaked in 1994, the frequency rate has declined by 8 percent in the rest of the country, while rising 13 percent in New York. The average cost of a bodily injury claim in New York is an alarming $20,617--compared to $7,972 countrywide. Therefore, small changes in this underlying measure can spell huge changes in auto insurance costs.

Other key findings of the AIA report discovered:

Personal injury protection loss costs in New York are 55 percent above the countrywide average. Personal injury protection is the first party coverage of medical expenses and in some cases lost wages paid by the accident victim's own insurer. There is a strong incentive for trial lawyers to "build up" their clients' medical costs under personal injury protection coverage as evidence for a liability lawsuit. Again, this problem is more severe in New York City.

Average loss costs for property damage liability are 19.4 percent above the countrywide average in New York. Average collision loss costs are 11.5 percent higher in New York than the countrywide average. Average comprehensive loss costs are 32 percent above the countrywide average. These costs can be attributed to higher repair and replacement costs in New York. Comprehensive costs in New York have actually dropped due to the decline in New York City auto theft. Auto theft, however, is a small component of overall insurance costs, accounting for 8-10 percent of underlying costs for policyholders who purchase all auto insurance coverages. With New York having auto insurance loss costs so far above the national average in all areas, especially critical injury coverages, it should not be surprising New York's average auto insurance premiums are 36 percent above the national average, according to the National Association of Insurance Commissioners (NAIC).

New York insurance company profitability is in line with national averages. A look at insurance company profitability between 1987-96 shows New York private passenger auto insurance generated an estimated return on net worth of 11.1 percent, compared to Fortune Magazine's all industry measure of 12.8 percent. New York's auto insurance lines have been somewhat less profitable than the average for all industry groups. Adequate profitability helps create a competitive market. Persistently unprofitable states tend to have fewer insurers and less competition on price and services.

To protect New York's high level of benefits for injured victims and to reduce costs, the AIA report recommends a number of simple reforms that have successfully reduced costs without reducing benefits in a number of other states. The AIA suggests the state of New York should re-enact optional personal injury protection managed care in a cost-effective manner. New York's managed care plan, to be terminated this summer, has not been as effective as those of other states because of cumbersome and wasteful implementing regulations, the AIA claims.

The report urges New York legislators to enact Medicare-based fee schedules and peer review governing health care charges under all auto coverages; a scheme that has proved successful in neighboring Pennsylvania in reducing medical costs.

Reforms are also required to protect New York's no-fault system so that minor injuries are not litigated, the AIA states. The system has worked well and kept insurance premiums an estimated 20 percent lower than they would be under a pure tort system but trial lawyers are eroding the no-fault system, bringing more minor and nuisance cases to court.

Finally, the AIA recommends that drunk and uninsured drivers should be penalized by reducing their ability to sue law-abiding citizens. California, Louisiana and New Jersey have all implemented similar reforms.