No-Fault Auto Insurance Reform in Michigan: An Initial Assessment

Abstract

When Michigan instituted no-fault auto insurance in 1973, its proponents argued that it would be a more efficient and less costly system for administering auto insurance claims than tort liability. Unfortunately, the opposite eventually proved to be true. Michigan’s system was unique among states because it provided unlimited no-fault medical benefits, and insurers were severely constrained in their ability to control medical costs. By 2019, Michigan’s auto insurance claim costs and premiums were the highest in the nation. This motivated the state’s legislature and governor to significantly reform its no-fault law and tighten its regulation of auto insurance. While these reforms and regulatory changes are relatively nascent, there is considerable interest in knowing their effects, including the consequences of allowing consumers to choose their level of no-fault coverage, instituting medical cost controls for no-fault coverage, and tightening the regulation of insurance companies. In this paper, we evaluate the no-fault reforms and their impacts. We find some initial evidence that claims costs and premiums for many drivers decreased substantially due to the reforms. However, medical providers and trial attorneys are advocating for legislation that tempers the cost controls, arguing that they are too harsh and arbitrary and that the adequacy and quality of care received by auto accident victims have suffered as a result. Fundamentally, there is the issue of whether it is possible to design a no-fault system that is superior to tort liability and is fair to all of a state’s residents in terms of the benefits it provides and its premium costs. Michigan could be viewed as an experiment on both the promises and pitfalls of a grand vision for no-fault auto insurance. Our paper contributes to an important debate on whether no-fault auto insurance can be saved and if it is worth saving.