The automobile insurance system in Massachusetts is a mess. Let us count the ways:

  1. Massachusetts has the fourth highest average auto insurance rates in the country and the insurance companies have requested a 12 percent increase for next year.
  2. Urban motorists pay well over the state average, with some current premiums between $2,000 and $3,000 per year.
  3. High rates encourage illegal activity, such as registering cars in lower-rated parts of the state or in neighboring states, and even driving uninsured.
  4. A harsh and inflexible merit rating system inflicts surcharges that last as long as six years for even minor infractions.
  5. The number of companies offering auto insurance in Massachusetts is now down to 20, fewest of all the states, with many of the largest auto insurers refusing to do business here.

We have a complex problem and the Legislature can fix it.

Part of the problem is that Massachusetts is the only state where the rates are set not by competition in the marketplace but by the insurance commissioner. Every year, the insurance companies come in asking for a rate increase based on what they think they need to do business, the attorney general comes in calling for a rate reduction based on what his office thinks is warranted, and the insurance commissioner splits the difference. But none of these interests–neither industry nor public–really knows what the insurance market would bear, and could live with, under the pressure of competition. The Legislature should immediately establish a commission to investigate ways to provide for a more competitive system of auto insurance that does not allow urban rates to skyrocket, as happened in 1977 when competition was briefly introduced.

The larger part of the Massachusetts problem lies in the way we provide personal injury insurance protection for drivers. Ours is a hybrid arrangement that is partly tort liability and partly weak no-fault–but wholly unsatisfactory.

Tort liability is the traditional approach to assigning financial responsibility for bodily injuries incurred in an auto accident, based on lawsuits. It is a court proceeding that, either through negotiation or judicial decisions, establishes which party is at fault for the accident and which party is entitled to compensation for bodily injuries, compensation that typically includes not only actual economic costs, such as medical costs and loss of wages, but also “pain and suffering,” plus attorney’s fees.

No-fault is the common name for a personal injury protection plan in which a party is compensated by his/her own insurance company for the actual cost of injuries without the need to resort to litigation. As a result, no-fault can pay out less–and offer considerable savings in insurance rates–but at the cost of the right to sue for pain and suffering. For instance, North Dakota, a no-fault state, has the lowest costs in the United States.

The Massachusetts system is a hybrid of the two, no-fault up to a monetary or verbal (specific categories of serious injury) threshold, when the tort system kicks in for any further compensation for personal injury. It was established as a compromise between a complete no-fault system and a complete tort system. Up to $2,000 in bills related to an accident-related injury are paid strictly on a no-fault basis. With between $2,000 and $8,000 in costs, an injured party can be compensated by their insurance company or they can file suit against the other party. For compensation of more than $8,000, however, the injured party must sue. Lawsuits are expensive, requiring the retention of legal counsel, and time consuming, sometimes taking two or three years to result in any recovery. A stronger no-fault system would provide timely payments for injuries sustained but forfeit compensation for pain and suffering.

The no-fault element of the Massachusetts auto-insurance hybrid has eroded over time. Given medical costs today, it doesn’t take much to reach the $2,000 threshold. Insurance companies are aware that injured parties can easily edge their economic losses up to meet those thresholds and then sue for further payments including pain-and-suffering as well as legal fees, up to the limits of the responsible party’s coverage. In anticipation of these tactics, insurers push for ever-higher premiums to protect themselves. For claimants, however, these insurance bonanzas are no sure things. According to a 2003 report by the Joint Economic Committee of the US Congress, “Auto insurance in most states is like a lottery system. If someone…suffers minor or no injuries, they can collect significant pain and suffering payments by abusing the system. However, if individuals are seriously injured, then they can expect to recover only a portion of their economic losses…and frequently will not see a dime for pain and suffering.”

All in all, it’s a Rube Goldberg system. Many consumers would prefer to have their economic losses covered in case of an accident, and not worry about the pain-and-suffering payments they might forfeit (along with expensive legal fees), in order to pay lower premiums today. Others might prefer to preserve their legal recourse to sue for full compensation and pay present-day premiums. But under our present system, this choice is not available to them.

We can change our auto insurance system, allowing consumers to make a choice between our present hybrid system and a new, stronger no-fault option. This approach extends a number of real benefits to Massachusetts drivers. The 2003 Joint Economic Committee Study states that the average savings under a strong no-fault option would be $333 annually, with urban car owners saving 40 percent or more on their insurance bills. These savings could bring down Massachusetts auto-insurance rates, lowering the cost of living for many families. These savings also mean that less affluent families can have easier access to jobs beyond convenient public transportation, especially in rural areas. A recent Catholic Charities report listed auto insurance as a serious financial burden for many low-income families and advocated for a more flexible system. A choice system would provide that flexibility.

These savings could also translate into higher levels of coverage for those who choose the no-fault option. In the event of a serious accident, $100,000 readily available from your own insurer under no-fault is of more use than $13,333 (the $20,000 minimum required coverage, minus a one-third contingency fees that goes to your lawyer) from the other party’s insurance carrier–if you win the lawsuit it will take to get it. In addition, a stronger no-fault option would cover single-car accidents as well. Currently, if you get hurt in an accident involving only your own car, there’s no one to sue.

The current hybrid system, weak and equivocal as it is, recognizes that the right to sue when you’ve been wronged is a big thing to give up. But common sense tells us that litigation costs eventually come out of our premiums, and that a system that avoids, or at least minimizes, litigation will provide premium savings or greater compensation for victims, or both. Not everyone will want to take the gamble, but everyone should have the choice.

The Massachusetts Legislature can offer that choice. The choice/no-fault approach is before the Joint Committee on Insurance in a bill entitled “Consumer Choice,” co-sponsored by 16 representatives and senators from across the political spectrum. Moreover, this call for reform is already part of the state Democratic Party platform, which states: “We call for genuine consumer-oriented automobile insurance reform and rate relief, including close regulatory scrutiny of industry rate proposals and a ‘Consumer Choice’ system that would empower car owners with a choice of coverage options to best fit their needs.”

To provide the best for our citizens and the Commonwealth, Massachusetts needs consumer-oriented auto- insurance reform. Let consumers decide.

Anne Paulsen is a Democratic state representative from Belmont. John Hayes is a citizen activist for automobile insurance reform.