When New Jerseys Automobile Insurance Competition and Choice Act was signed into law in June 2003, it had widespread support as the solution to what everyone agreed was a genuine crisis in auto insurance in the state. There were, as always, a few nay-sayers, like Robert J. Hunter, coordinator for the Consumer Federation of America and a former Texas insurance commissioner, who argued that New Jerseyans [would] rue the day that this became law.

Even enthusiasts urged patience. Holly C. Bakke, then New Jersey State Banking and Insurance Commissioner, cautioned against expecting that insurance companies would immediately rush in to do business in the state, but said that positive change would eventually attract them. Others talked about long-term effects, gradual improvement, a good start.

It took until near the end of 2004 for the act to come fully into play. By the end of 2005, even its supporters were astonished by the auto insurance markets 180-degree turn-around. But it seems that even the shiniest apple has a worm. In New Jersey, that apple is not the 2003 Competition and Choice Act, but the Automobile Insurance Cost Reduction Act (AICRA) of 1998. The worm is a court decision handed down in June 2005, which held that the serious life impact test did not apply under AICRA. And the doom-and-gloom contingent has been out in full force ever since.

First, The Good News

Though there is still more anecdotal evidence than hard data, no one argues that Competition and Choice did not effect a radical change in the auto insurance market. The act absolutely did what it was meant to, said John A. Latimer, Esq., president of PIA of New Jersey and president of J.S. Braddock Agency. That the effect has been so significant so quickly came as a surprise to me and many other agents.

Jeanne Heisler, IIABNJ government affairs representative and an agent with Ronan Agency, concurs, saying, In the past 12 months, weve seen that the market has turned around, good drivers are saving money. She added that the newly competitive environment, for which she credits the act, has encouraged many carriers to restructure their ratings and enabled agents to shop around for the best deal for their customers. More companies are looking to enter the Jersey market, companies that were already here are growing, and were seeing more companies appointing agents, she noted.

Latimer puts it even more emphatically: Competition is fierce; its absolutely amazing whats happening, he said. Only half-joking, he explained that agents have been trained to hide from customers, and everyone pulled their auto insurance ads. Now there are ads everywhere promising Low Auto Insurance Rates. He noted, too, that, of the independent agent companies that have awakened and risen to the new marketing challenge, each has between five and ten new initiatives in process or planned, to adjust rates, market to new segments of the market, and attract and retain new customers. Thats something we havent seen in decades, he said.

The effect of the reforms on rates is perhaps most surprising to the original skeptics, who argued that the 2003 legislation did not contain any provisions that would dramatically reduce rates. Even Richard J. Codey, then the Acting Governor, carefully referred to lower costs, not lower rates, in describing the benefits of a stronger marketplace. Latimer, on the other hand, is among the agents who see a considerable drop in rates, something that concerns him greatly. I would argue that the act has now driven rates down to a level that cant be sustained, he said, pointing out that if New Jerseys rates have been exceptionally high in the past " and remain at the top even now " that has much to do with the density of population, number of expensive cars, and similar factors.

Now the Bad News

One of those factors, not surprisingly, has been litigation, a Pandoras box whose lid was, by all accounts, lifted by the 2005 court decision. First, some essential background. Under the 1992 Oswin v. Shaw, the New Jersey Supreme Court held that a victim of an automobile accident who elected the verbal threshold " so called because it is descriptive of noneconomic injury, rather than being a monetary threshold " was required to prove that he or she suffered a serious life impact, in addition to first proving that the injury fit into one of nine statutory categories. As Latimer put it, in exchange for limiting their right to sue for noneconomic damages " as 92 percent of automobile policyholders in New Jersey do " car owners pay lower premiums.

That was then. This is now, as the July 2005 issue of PIANJ Reporter explains:

In 1999, Christina DiProspero was injured when the car driven by Barbara Penn crashed into DiProsperos car. Both the trial court and the Appellate Division held that DiProspero failed to prove that her injuries had a serious life impact, and found for Penn. When DiProspero v. Penn came before the N.J. Supreme Court last summer, however, the justices concentrated on the plain language of the prevailing statute, AICRA. They found that the limitation on lawsuit threshold does not, in fact, contain a serious life impact standard and that, moreover, nothing in the statutes preamble, the sponsors statement, its legislative history, or its policy considerations would suggest that the Legislature intended to include serious life impact.

The courts decision was unanimous and its effect plain: while they must still prove that an injury fits one of the nine categories, plaintiffs in automobile accident cases in New Jersey are not now required to prove serious life impact.

It did not take long for the faithful to rally to the cause. Critics of the decision sounded off even before the ink dried on the ruling. The AIA, PCI, and the Insurance Council of New Jersey filed an amicus brief with the court. Together with others in the insurance industry, they launched a media blitz dominated by language such as extraordinary additional costs, devastating impact, and, of course, frivolous lawsuits. AIA vice president and assistant general counsel David Snyder said, The Supreme Court has effectively gutted the verbal threshold and potentially opened up the flood gates for litigation in non-serious injury cases. He argued that the ruling wipes out many of the possible savings realized by those drivers who elect to be bound by the threshold.

The Save Choices for New Jersey Drivers coalition, a group consisting of insurance companies, agents, trade associations, and business organizations, commissioned an independent actuarial study by Pinnacle Actuarial Resources, Inc. of the impact of the decision on automobile insurance premiums. The report, issued in November 2005, concludes that the best estimate of the Supreme Court decision will be an increase " in Bodily Injury and UM/UIM costs for drivers selecting the verbal no-fault threshold option " of between 36 percent and 57 percent. This would translate to an increase in the average premium of as much as $182 per car, or more than $300 per year for the two-car family.

There are, of course, the counter-arguments. Cynthia M. Craig, an attorney and expert on New Jersey auto insurance law, pointed out that someone injured in an automobile accident would still have to meet the six criteria and those are tighter than they were before 1998. E. Drew Britcher, president of the New Jersey chapter of the Association of Trial Lawyers of America, called the decision a victory for consumers.

Some lawmakers are certainly taking the predictions seriously. As reported in Insurance Advocate in June, 2005, within a week of the courts decision, three Republicans " two Assemblymen and one Senator " introduced legislation requiring that a permanent injury must also cause a serious impact on the injured partys life before he or she can sue for pain and suffering payment.

How Big an Impact?

The question seems to be not whether rates will rise and law suits increase. One Assemblyman, Neil Cohen, who chairs the Financial Institutions and Insurance Committee, described the Pinnacle study as a scare tactic, and asserted that the Legislature will not pass any law that would reverse the courts ruling. Jaimee Gilmartin, speaking for the Department of Banking and Insurance, indicated that the department has no evidence so far of any impact on the market or on insurance rates and said, Its way too soon to tell.

Even those who are convinced of the inevitability of fallout from the court decision believe there is no imminent crisis. Bernard Flynn, general counsel and senior vice president of New Jersey Manufacturers Insurance Co., said that, while higher premiums are a certainty, Its not going to happen overnight. Jeanne Heisler, too, believes that it will take time for the evidence to accumulate. I think there will be a wait-and-see, she said. The Legislature will want to see some of the statistics as we move forward, and it may take until next year to see what cases end up in the court system and what the long-term effect is.

But John Latimer believes that, at least as far as the volume of litigation is concerned, the fallout has already begun. Everyday since last June 14, a case previously tossed out because the judge felt the victim could not meet the standard of proof has been refiled in court, he said. Its all been very quiet and hush-hush, but lawyers are now advertising for cases that had been thrown out, because they know that, based on DiProspero, those cases can be heard now.

Moreover, he said, the wait-and-see approach may be fine for the Legislature and the courts, but insurance companies cannot wait. He pointed out that carriers have to increase their reserves to account for the likely additional costs attendant on the DiProspero decision, but he asked, How do you increase reserves if you cant raise rates? The actual increase in costs is still unknown and cannot be proved now, he explained, and the Insurance Depart-ment would be unlikely to agree to rate increases on the basis of projections.

Waiting for the Other Shoes to Drop

As though DiProspero were not enough to roil the auto insurance market, two other politically-freighted matters are coming to a head.

For more than 20 years, New Jersey has placed a cap on the amount insurers can charge urban drivers. Though it is a truism that city driving is inherently high risk and produces more claims, the state protected urban drivers by limiting their rates. Under the 2003 Competition and Choice Act, those caps were to be eliminated beginning in 2006, following a process under which the more than 50-year-old rating maps were to have been redrawn. But the process is still underway, and when the issue of removing the caps percolates to the top of public attention, those who believe that urban rates will skyrocket will have an attentive audience.

If judging a person by his or her domicile, as it were, may become a loaded issue, using education and job status to set rates is already explosive. An article in the February 27 Star-Ledger reports that GEICO uses those factors to set premiums, charging more for blue-collar workers and the less educated. Though GEICO is singled out in the article, other carriers also use them, as is permitted for the first time in New Jersey under the 2003 Competition and Choice Act.

Consumer groups and some lawmakers have expressed outrage, calling GEICOs policy unconscionable, discriminatory, and a marketing mechanism that is targeted on rich people. But Gilmartin explained that using occupation and education to set rates is allowed if a company proves a correlation with losses. [GEICO] was able to justify it, she said, adding, I dont know that weve gotten a single question or complaint with regard to the use of education or occupation. Not yet, perhaps. But Latimer described the GEICO story as the beginning of a backlash against the use of the new factors.

Fallout from the DiProspero ruling, the likely removal of caps on premiums for urban drivers, and now education " and occupation-driven rating: if the whole " the state of the automobile insurance market in New Jersey " really is greater than the sum of its parts, 2006 will turn out to be busy and interesting year.