Michigan drivers may soon experience some financial relief in the form of car insurance cost savings. On May 30, 2019, Michigan Gov. Gretchen Whitmer signed a new no-fault law into effect after it had been passed by the state senate just days earlier. This new law eliminates the previous requirement for all Michigan drivers to purchase expensive, unlimited no-fault personal injury protection (PIP) benefits. The new law also creates several tiers that make it much easier for drivers to purchase varying levels of coverage.

Why Was No-Fault PIP a Problem?

Michigan has been the most expensive state in the U.S. for drivers for several years running. Car insurance rates in Michigan average $3,059 per year, or $255 per month.

Several factors went into these high rates, but Michigan’s previous requirement that all drivers purchase unlimited no-fault PIP coverage was key among them.

The unlimited PIP coverage requirement was not only unique to Michigan, but helped create a toxic environment for Michigan’s car insurance providers and purchasers.

It required insurers to cover an "unlimited" amount in injury claims and was considered a leading cause of fraudulent activity in the car insurance market, as both drivers and even some medical providers were making false injury claims.

Insurers did have some relief through the Michigan Catastrophic Claims Association Fund.

This fund releases liability for insurance providers in cases where catastrophic injuries result in medical expenses that exceed $580,000. Still, as a consequence, car insurance companies were forced to charge more to help mitigate the high costs associated with fraud.

In essence, the no-fault PIP system in Michigan, which was designed to lower car insurance rates, resulted in higher rates due to abuse of the system.

The new law completely eliminated the need to purchase unlimited PIP coverage, while creating several coverage tiers and making allowances for those who have Medicaid. Specifically, the new law creates four coverage levels:

• $50,000 (for drivers enrolled in Medicaid)
• $250,000
• $500,000
• No limit (as was previously required for all drivers)

An additional opt-out feature now exists for those covered by Medicaid, as well. Michigan drivers who receive Medicaid can choose not to maintain coverage for no-fault PIP at all.

These changes should bring some much-needed relief to a large number of Michigan residents and families. Roughly 25% of Michigan is covered by Medicaid and about 11% of residents aged 18-64 are enrolled in the state’s "Healthy Michigan" Medicaid extension program, which provides Medicaid coverage for individuals making less than $16,000 per year, or families earning less than $21,600.

Although the cost savings will only be seen in the no-fault PIP portion of drivers’ auto insurance premium, drivers should still see some noticeable savings. There are limitations, however. The deal only lasts for 8 years, which means insurance companies can boost rates back up after that time period unless another update is made before then.

Michigan is one of just a handful of states that require drivers to purchase PIP coverage. At present, many states offer some form of no-fault PIP, but it’s only compulsory in 16 states.

In other states, minimum PIP requirements start as low as $2,500 (Maryland), while several states have a mandatory PIP requirement between $10,000 to $20,000. That difference helps account for why Michigan’s car insurance rates are the highest in the country, but only to a limited degree. Many other states without compulsory no-fault PIP coverage also have high rates. In some cases, higher insurance rates can be influenced by a large number of uninsured drivers (such as in California), or even excessive amounts of litigation (as seen in Louisiana).

In general, the point of no-fault PIP insurance is to keep rates lower. Michigan’s application of compulsory unlimited no-fault insurance created an environment favorable to fraudulent activity. This difference means that other states with no-fault PIP requirements may still keep them, but some may begin to more thoroughly assess the impact that compulsory PIP requirements have on their state’s insurance rates and the rate of uninsured drivers.

A key part of Michigan’s new law is the option for Medicaid recipients to opt-out of the compulsory no-fault PIP coverage. This new change may lead to an increase in Medicaid enrollees in the state, as some residents who were on the fence about enrolling in Medicaid may see the added benefit as enough incentive to voluntarily sign up.

But there may be a more immediate impact on health insurance costs in the state. A section of the new Michigan law caps the amount medical providers can charge car insurance companies for automobile-related accident claims.

The new cap ranges from 200% to 250% of what Medicare pays for treatments, making it difficult for hospitals or healthcare organizations to charge significantly higher rates for car accidents.

Those caps, as well as a reduction in PIP fraud, could create a trickle-down impact on health insurance rates in the state. Fraud in medical coverage claims ultimately impacts the rates health insurance providers charge.

With fewer fraudulent claims making their way to the providers, Michigan residents may see a reduction in health insurance rates as a result.

Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.