Understanding No Fault Accident Car Insurance
Living in a state that assigns ‘no fault’ after auto accidents may sound like a dream come true. But before you rent that U-Haul and pack your things, you should know that “no-fault” is a widely misunderstood term. That’s partly because there almost always is someone at fault in auto accidents (and it’s also usually pretty clear who), and also because to some the term implies a lack of financial accountability. Rest assured that someone will foot the bill for each and every car accident that occurs, and no-fault doesn’t mean no responsibility.
What is No-Fault Insurance?
Here are the main features of a no-fault insurance system:
- Requires drivers to carry personal injury protection (PIP), which covers your medical bills, lost wages, funeral expenses or rehabilitation, with state-required minimum limits ranging from $20K to $1 million;
- Limits the ability to sue other drivers for damages after accidents; and
- In the event of a multiple-car accident, your insurer will pay for your property damage or medical expenses, and the other party’s insurer will pay for theirs, regardless of who was at fault.
No-fault systems are an alternative to the more popular contributory negligence and comparative negligence systems used in most states. Here’s how they work:
- Your bodily injury liability coverage pays for the other party’s injuries if you’re at fault, and your policy’s property damage liability coverage pays for damage done to another’s vehicle or property if you’re at fault. The other person makes the claim on your insurance policy, not theirs–the opposite of a no-fault outcome; and
- Anyone can sue an at-fault party for any amount of money in civil court. This is known as ‘full tort’ coverage.
Why No-Fault Systems Were Created
During the 1960s, tort liability auto insurance started causing concern because legal proceedings within the tort liability system were expensive and extremely time-consuming. The U.S. Department of Justice concluded that 60% of personal injury lawsuits are related to automobile accidents, with between 4 and 5% of those suits actually proceeding to a full-blown trial. As many as 90% of auto accident trials are decided by a jury, and plaintiffs win about 64% of all auto accident trials.
No-fault car insurance regimes were conceived as a way to significantly reduce the number of drivers heading to court, if not completely eliminate the need for those costly legal proceedings. No-fault was also intended to increase the overall efficiency of the insurance system. Thus, in the early 1970s, no-fault legislation was introduced in a number of states.
Twelve states currently have no-fault insurance laws, in addition to Washington D.C. and Puerto Rico:
- New York
- North Dakota
- New Jersey
There are no states with a pure no-fault system. States either have no-fault rules or they don’t, and the rules vary from state to state among those that do. For example, no-fault states differ with regard to a policyholder’s ability to sue another party. There are two main regimes used to establish thresholds for who can sue:
Quantitative Monetary Threshold: This establishes a specific dollar limit for how much an insurer will pay for medical bills and/or lost wages before their policyholder can sue the other party. Once a policyholder reaches this limit, they’re free to pursue litigation. There are two key disadvantages here: first, this system may encourage policyholders to pad medical bills and lost wages from the get-go in an effort to quickly surpass allowed limits and pursue more money via claims and litigation. Additionally, as time goes on, the threshold can become inadequate due to inflation if it’s not periodically adjusted by the legislature.
Qualitative Verbal Threshold: States using this system decide and define which categories and specific injury types are serious enough to warrant recourse through legal action. Sue-able injuries typically include things like death or permanent disfigurement/disability. An advantage of this system is that it eliminates any incentive on the policyholder’s part to inflate damage amounts. Even so, qualitative thresholds are still open to broad interpretation and argument as to what qualifies. Additionally, in some scenarios there may be severe injuries that don’t meet the state’s defined benchmark. Unfortunately, this can leave seriously injured parties without recourse to adequate compensation.
Other Types of Auto Insurance Systems
Apart from a no-fault car insurance liability system, there are three others that states employ:
Tort Liability: In these states, any driver can sue for any damages. A policyholder deemed at-fault in an accident can be sued by the other driver or passengers for any out-of-pocket expenses such as medical bills and also punitive damages for pain and suffering. Broad exposure to financial liability can be devastating – the average cost of a hospital stay alone is $22,000.
Choice No-Fault: In these states – Kentucky, Pennsylvania, and New Jersey – drivers can choose between no-fault coverage or traditional tort coverage which preserves their right to litigate. In Pennsylvania and New Jersey, the no-fault option has a verbal threshold. In Kentucky, the no-fault option has a monetary threshold. The choice must be made when the policy is obtained, and can’t be changed until you buy a new policy.
If you live in one of these states and are purchasing insurance, ensure that you’re familiar with the options and their associated premiums. Saving $5 each month doesn’t seem to justify not being able to pursue pain and suffering or other incidental damages when a drunk driver hits you. On the other hand, the cost of tort coverage is much more expensive if you have a less-than-perfect driving record or are a young driver, as insurers are taking on a higher risk and will naturally pass that cost on to you.
Add-On: With add-on insurance, drivers will be compensated for damages through their own insurance company as they would in a no-fault state, but there are no restrictions on lawsuits.
Pennsylvania was previously an add-on state, but started allowing policyholders to choose between a verbal threshold or traditional tort coverage in 1990. Alternatively, Washington D.C. offers policyholders the choice of pursuing a no-fault recovery or a fault-based recovery within 60 days after a car accident.
Many states that originally passed no-fault laws have since repealed them or made significant changes. Georgia, for example, was no-fault from 1975 until 1991. The system didn’t work in practice because the threshold was set too low at $500, which of course left many injured drivers and passengers without adequate recovery options. Connecticut found itself in a similar situation due to a low monetary threshold of $400, and repealed its no-fault law in 1993. Within the past few years, Florida and Michigan have both made changes to their no-fault systems due to an increase in auto insurance fraud.
How Effective is No-Fault Insurance?
The effectiveness of no-fault insurance varies widely from state to state. As mentioned previously, states with a high monetary threshold create attractive targets for exploitation by policyholders and shady ‘medical mills’ (networks of fake pain clinics and corrupt medical and legal practitioners). A recent study concluded that a high-threshold no-fault system ultimately results in higher insurance premiums for all policyholders (rates in no-fault states are up to 50% higher than those in states with a tort system).
Also, if a no-fault policy doesn’t have a provision in place allowing the monetary threshold to be adjusted to keep up with inflation, the effectiveness of the coverage gradually deteriorates. And verbal thresholds are open to significant dispute over interpretation, as previously mentioned.
That said, in states like New Jersey, which continually strives to reform its no-fault law, improvement is gradually showing. For example, in 1998 New Jersey gave its auto insurance system an overhaul and began reducing exploitation and fraud by creating “Care Paths” which established pre-certified medical guidelines to help determine what sort of treatment a policyholder can expect to receive depending on his or her injuries.
Some say no-fault insurance expedites the claims and payments processes because insurers work directly with their own policyholders. Others believe that no-fault doesn’t sufficiently punish drivers who make poor choices. This argument seems compelling when someone who is not at-fault ends up paralyzed for life, loses limbs, or suffers brain damage. Critics say that taking away a victim’s ability to seek full compensation for losses only adds the proverbial ‘insult to injury’.
No-fault insurance can be confusing, so if you live in a no-fault state, get advice from an insurer who can clearly explain the options, benefits, and drawbacks of each type of coverage.