Two sharply contradictory responses to the story of David’s leg (smashed by an uninsured motorist as he walked his bike across a busy Los Angeles intersection). If you missed it, David will probably get nothing for his pain and loss of income and be stuck with his share of a $50,000 hospital bill. Or if he can squeeze $10,000 out of the woman who owned the car that hit him (even though she wasn’t driving it), I said, $4,000 of that would go to his attorney. It’s an awful system that encourages massive waste and fraud at the expense of real victims, like my friend David.
Wrote Brian Budenholzer: “I loved your comment. But having been recently a victim of a plaintiff’s attorney, I would like to correct one error you made. Before David could get his share of any settlement, not only would the attorney’s contingency fee be deducted, but also any expenses incurred by the legal action. If those costs came to two or three thousand dollars, David’s share of the $10,000 you spoke of would be only $3,000.00 or $4,000.”
A distinctly different view came unsigned from someone who wrote: “Stating that the ‘lawyer will be $4,000 richer’ [from his 40% of the $10,000 David might conceivably get] is a sad commentary. Moreover this is a conception that lawyers have taken a vow of poverty. The practice of law is a business. . . lawyers have overhead expenses of: utilities, copiers, laptops, law libraries, secretaries, malpractice insurance, license fees, seven years of educational loans etc. Ask Fred Goldman if his team of counsel endeavored the recent civil trial for the ‘riches.’ David’s chance of securing any monetary relief without the professional assistance of counsel is probably 10% to nil. There was NO statement that the hospital was $50,000. richer from capitalizing on David’s leg injury.”
This unsigned message was absolutely correct: Under today’s awful system, David’s chance of securing any monetary relief without the professional assistance of counsel is probably 10% to nil.
But what if we could have a system where David was taken care of without needing a lawyer? Wouldn’t that be better? I don’t know how metal rods could have been implanted in David’s leg without a surgeon and a hospital — that $50,000 may have been unavoidable — but I do know how it could have been done without a lawyer.
Prop 200, the no-fault plan I helped put on California’s March 1996 ballot, and which the lawyers pulled out all necessary stops to defeat, would have provided pedestrians like David up to $1 million in medical, rehab and wage loss coverage automatically, without any need to sue or prove fault, plus up to $250,000 more for pain and suffering.
In cases where the injury was caused by a hit-and-run driver or by an uninsured motorist (as in David’s case), the claim would have been handled via what’s known as an “assigned claims plan.” All the auto insurers in the state would have been assigned their proportionate share of such claims. And if the insurer assigned David’s claim had failed to pay promptly, it would have been subject to a 2%-a-month interest charge and, ultimately, damages for dealing in “bad faith,” as determined by a jury of David’s peers. (As a practical matter, Prop 200 would actually have expanded an injured person’s right to sue recalcitrant auto insurers for bad faith.) Right now, auto insurers know that by dragging their feet, they can “borrow” from crash victims at zero interest. Under Prop 200, it would have cost them 24% a year. That would have changed their incentives and, I think, their behavior.
Today in California, consumers pay $7 billion annually for the lawsuit auto insurance injury system (separate from what they pay for theft and dented fenders). Of that, two-thirds goes to lawyers and fraud. Prop 200 would have redirected those wasted dollars to people with genuine injuries, especially those most seriously hurt. Today, on average, according to RAND, the worst-hurt recoup just 9% of their actual economic losses from that $7 billion pool.
We should never eliminate the little guy’s right to sue the big guy. General Motors. Allstate. The City of Los Angeles. But the little guy’s right — and need — to sue other little guys over auto accidents has proved horribly expensive, leaving all but a lucky few of the most seriously injured woefully undercompensated. Is 9% really enough? Does it really make sense to spend two-thirds of our money on lawyers and fraud?
In Michigan, the only state with a strong no-fault system, consumers pay significantly less than in California and yet have vastly better protection if badly hurt. How is this possible? It’s because they’ve traded the right to sue each other for the right to be compensated without having to sue.
In Michigan, very little of the premiums go to lawyers or fraud. With a true no-fault system, there’s little need of lawyers. (Prop 200 made this exception: you could sue convicted drunk drivers.) And there’s little incentive for routine fraud. (Michiganders are less than a third as likely to claim “whiplash” after an accident as Californians. It only makes sense for them to say their necks hurt if they really do. There’s no cash prize for inventing or padding claims.)
My comments over the last couple of days were not meant to insult or knock individual lawyers. After all, they didn’t invent the current awful auto insurance system. But I do criticize those who fight so hard to defeat efforts to fix it. How do they sleep at night?
Tomorrow: Michigan vs. California
Quote of the Day
Very few American investors buy any stock for the sake of something which is going to happen more than six months hence, even though its probability is exceedingly high; and it is out of taking advantage of this psychological peculiarity of theirs that most money is made.~John Maynard Keynes
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