Several insurance trade groups spoke to New York legislators about the need for no-fault auto insurance reform as state residents deal with record increases, spurred by an “epidemic” of fraud.

The groups, speaking Feb. 4 at a New York State Senate Standing Committee on Insurance hearing on the issue in Albany, explained the trend and how it can be halted.

Kevin Ryan

The Professional Insurance Agents of New York State’s president, Kevin M. Ryan, said the association supports the system, but addressed the need for reform.

“Our member agents have been well-served by the state’s adoption of no-fault, as such policies were able to more quickly prove their value in the event of an accident,” Ryan said. “However, insurance costs in New York have reached record highs, as a direct result of the abuse of the no-fault system. It’s clear that the time has come for true, comprehensive reform to the system in order to fight the epidemic of insurance fraud.”

A recent Insurance Information Institute analysis found that New York’s automobile insurers saw their typical no-fault payment for the medical care of accident victims rise by 56% in the second quarter of 2009. Costs associated with fraud and abuse of the state’s no-fault system help contribute to New York residents paying the second-highest premium rates in the country, 111% higher than the U.S. average.

Courts clogged, costly for consumers

“There are fundamental problems with the no-fault insurance system that need to be addressed,” said Gary Henning, the American Insurance Association’s Northeast Region assistant vice president. ISO Fast Track and AIA analysis, according to Henning, found that New York’s no-fault average claims costs are the third highest in the nation, about $8,504 per claim as of the third quarter of 2009.

“The legislature must act to reverse this trend of increasing no-fault costs, which have led to consumers paying more for automobile insurance,” said Henning.

The Insurance Information Institute, an industry research organization, found that New York’s auto insurers have seen a 56% increase in the average cost of no-fault claims since 2004, due in large part to fraud and abuse in the system.

“No-fault plaintiffs’ lawyers, particularly in New York City, are clogging the courts with no-fault cases,” said Henning. He noted that the Insurance Information Institute found that about one-third of cases in New York City courts are no-fault cases, and cases brought in 2009 received 2011 court dates.

Ryan said what works well also creates problems. “The very strengths of the no-fault system, such as expedited payment without needing to prove responsibility for an accident, also make it a target for the unscrupulous, as staged accidents, medical mills and dishonest health-care providers and attorneys exploit the system for personal gain,” he said.

New York’s ‘glaring exception’

Robert Hartwig, an economist and president of the Insurance Information Institute, said New York’s system is the same as other states. However, “there is one glaring exception—its $50,000 threshold for no-fault auto insurance claims is the highest dollar threshold in the United States. It should come as no surprise that the richest benefits in the country come with the highest costs,” Hartwig said.

He added that insurers, the New York State Insurance Department’s Frauds Bureau, the National Insurance Crime Bureau and law enforcement agencies continue to investigate suspicious claims vigorously. Yet loopholes in the no-fault system make it particularly vulnerable to fraud and abuse by a “no-fault industry” of corrupt medical professionals, attorneys, and street-level criminals who work on their behalf, he said.

The PIANY, a trade association representing professional, independent insurance agencies, brokerages and their employees throughout the state, wants changes, including requiring the use of medical guidelines for specific auto-related injuries to reduce over-treatment and unnecessary procedures; requiring that disputes be resolved by arbitration to speed up the resolution of claims and avoid the costs and uncertainty of a trial;  and permitting those with claims for less than $5,000 to submit proof based on a doctor’s sworn affidavit instead of requiring physicians to appear in person.

The group also would like to see legislators overturn the New York State Court of Appeals decision in Presbyterian Hospital v. Maryland Cas. Co., which held that failure to pay or deny claims within the statutory 30-day period affects a waiver of essentially all defenses an insurance company would otherwise have to paying such claims, rendering insurance companies virtually defenseless in subsequent actions.