It is an unfortunate reality that, in general, wherever there is an idea rooted in the desire to do good, there is someone bent on distorting that concept to satisfy selfish ends. This notion is painfully obvious to those familiar with the no-fault systems in New York and New Jersey.

According to information on the Insurance Information Institutes (I.I.I.) website, The term no-fault auto insurance is often used loosely to denote any auto insurance program that allows policyholders to recover financial losses from their own insurance company, regardless of fault. But, in its strictest form, no-fault applies only to state laws that both provide for the payment of no-fault first-party benefits and restrict the right to sue, the so called limited tort option. The first party benefit coverage is known as personal injury protection (PIP).

Put more simply, Allen Financial Group, which describes itself as a national, multi-line brokerage group with facilities that span the standard, surplus and specialty marketplace, defines the no-fault system on its website by explaining, When you have an accident under a no-fault system, your insurer automatically pays for your damages, regardless of fault (up to the specified policy limit). In exchange for this guaranteed payment, you must give up some of your rights to sue the other driver involved in the accident.

Origins

The concept of no-fault gained popularity after the traditional auto liability system came under scrutiny in the 1960s, the I.I.I. website explains. Essentially, consumers, insurers, and regulators criticized the traditional system because the process of determining who was legally liable in an accident was often time-consuming and expensive. In the 1970s, I.I.I. notes, states began to enact no-fault systems to address this problem. According to the I.I.I., 12 states and Puerto Rico currently have no-fault insurance laws.

The details of the no-fault systems enacted in these states vary. In actuality, no state operates under a pure no-fault system, in which, as Allen Financial describes, the insurer pays for economic damages up to the policy limit, and the insured is completely prohibited from suing a negligent driver for non-economic damages (such as pain and suffering, loss of companionship, etc.).

Instead, Allen Financial notes, no-fault states have adopted a modified no-fault system. This means that your insurer still pays for your economic damages up to the policy limit, but you may be allowed to sue for non-economic damages if the amount of these damages exceeds a specified tort threshold. The threshold can be either verbal or monetary (or a combination), and is designed to limit lawsuits to only the more serious injuries.

Under a verbal threshold, lawsuits for non-economic damages are limited to serious injuries " usually defined as broken bones, severed limbs, and other similar injuries " or death. Under a monetary threshold, a certain dollar amount in medical bills must be reached in order to bring a lawsuit. Florida, Michigan, New Jersey, New York, and Pennsylvania use the verbal threshold, while Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota, and Utah utilize monetary thresholds.

Drawbacks

It is interesting to note that, although no-fault was billed as a way to limit lawsuits and control costs, premiums in no-fault states are actually, on average, 25 percent higher than states which use the traditional liability system, according to Allen Financial. In addition, in New York, contrary to the intended purpose of the no-fault law, the court system is clogged with lawsuits filed by claimants seeking no-fault benefits.

There are a number of contributing factors to this; one problem that that has hit New York and New Jersey particularly hard has been fraud. This fraud has been perpetrated by criminals " some functioning in highly-organized fraud rings " who have found ways to exploit the no-fault system for their own financial gain.

In New York, the problem is particularly acute. On its Website, the I.I.I. reserves an entire section in its Hot Topics & Issues Updates specifically for no-fault fraud in the state. Defining the problem, I.I.I. explains, Investigations by insurers and law enforcement agencies show that organized crime rings, along with a small number of unscrupulous medical providers and attorneys, are manipulating the personal injury protection (PIP) part of the New York State no-fault auto insurance plan at the expense of the states policyholders.The result has been a fraud tax, levied through higher premiums, on the general public to compensate for the extra cost burden to the insurance companies.

The No-Fault Fraud Ring

An April 2004 story in the publication Crackdown!, which focuses on insurance fraud and was, at the time, a spin-off of Insurance Advocate, demonstrated how these fraud rings operate in New York. There is a structured hierarchy that is truly striking in its scope and organization. From the bottom, it starts with jump ins, who participate in staged accidents, which are necessary to get the ball rolling in filing fraudulent claims. These jump ins are recruited and paid by runners. The runners are, in turn, employed by bogus medical clinics, known as medical mills.

After the staged accidents, the runners steer the jump ins to these medical mills, where costly, often unnecessary medical treatments are rendered for the sole purpose of fraudulently billing these services to insurance companies. One medical mill could consist of many parts, including a physical therapist, an acupuncturist, a chiropractor, etc. These parts are established as separate entities so that, should one get caught for fraud, the rest of the operation does not go down with it.

Finally, some unscrupulous lawyers then pay the medical mills in exchange for referred clients, who the lawyers represent against the insurance companies.

Fighting Back

Tackling such highly-organized entities may seem like an insurmountable task, but there are those who are trying. In recent years, no-fault insurance fraud has received increased attention from authorities, legislators, and the mainstream media, explained Howard Goldblatt, director of government affairs for the Coalition Against Insurance Fraud. In particular, he noted the coordination between the industry and law enforcement, which has resulted in the dismantling of some of these fraud rings.

There have been other initiatives on the regulatory and legislative side as well. After a long battle, which involved a lawsuit filed in the New York State Supreme Court, Regulation 68 was enacted in April 2002 by the New York State Insurance Department. The regulation reduced the time allowed by claimants to give notice of an injury from 90 days to 30 days, and also reduced the time limit for submitting medical bills from 180 days to 45 days.

As I.I.I. notes, previously, claimants had 90 days to submit a claim and 180 days to submit proof of medical, wage loss, or other expenses. Conversely, insurers only have 30 days to decide whether to accept or deny the claim. Insurers argued that this put them at a severe disadvantage when trying to combat fraud. In noting how Regulation 68 helps insurers, I.I.I. states, The Insurance Department says that the reduced notification time [allows] insurers to look sooner at the treatment plan, thus providing fewer opportunities for unnecessary diagnostic tests and treatments.

On the legislative side, Goldblatt cited the passage of S.4854 in 2005. This bill, he said, cracks down on the bundling of cases by lawyers. Previously, lawyers were able to pay only one filing fee for many lawsuits, and they would then serve the insurance companies with countless lawsuits at once, knowing that the company would have a limited time to look into the validity of the claims. Many of these lawsuits would be frivolous, served only to cause clutter and chaos and complicate the companys response. Robert Wallach, chairman and CEO of The Robert Plan, previously recounted to Crackdown! one such story, in which his company was served with 7,000 lawsuits in one day by one lawyer. With the enactment of S.4854, Goldblatt said, lawyers must now file each lawsuit under separate index numbers, increasing the cost to bring frivolous and fraudulent lawsuits to insurance companies.

Stepping Up the Fight

All of these fraud-fighting efforts have had benefits, as companies have saved money, and, after prodding by then-Superintendent Gregory V. Serio, those savings have been passed onto consumers. But much more needs to be done to combat no-fault fraud in New York. Goldblatt explained that the criminals are adapting to current initiatives, and he faulted the Legislature for not passing common sense bills that would help insurers and law enforcement gain an upper hand on the problem.

As an example of criminal adaptation, Goldblatt said that modern schemers are steering away from actually perpetrating staged accidents, and instead are simply filing the paperwork to open the door to the medical side of the scams. Theyre still creating accidents, he explained, but they are no longer using crash dummies.

Additionally, Goldblatt said that medical mills in Brooklyn and Queens are recruiting crash victims from other areas in the state, such as Buffalo, where insurance fraud is less common, and therefore can go undetected by authorities. With law enforcement cracking down in the city, he said, they are reaching out to other parts of the state.

With respect to the Legislature, Goldblatt wondered aloud why New York still has yet to pass a law that would make it a felony to be a runner. Many other states have enacted this, he said, but New York fails to pass this measure each year. He also said he would like to see stricter licensing of medical clinics to make sure that those rendering treatment are true medical professionals rather than professional fraudsters.

In regards to statements by members of the Assembly that fraud-fighting bills such as these need to be balanced with consumer protections, Golblatt said that he has heard such comments. Some of [those] concerns, he said, weve scratched our heads over.

By criminalizing staged accidents and runners, he asserted, youre helping consumers.

Goldblatt added, Ask the family of Alice Ross, referring to the 71-year-old grandmother who was killed in Brooklyn by being an unknowing participant in a staged accident.

Continued next issue: Fraud in New Jersey and Staying Ahead of the Criminals