No Fault Insurance - What You Need to Know

Most states have a standard fault-based ("tort") system where each driver’s insurance company provides payments based on each driver’s percentage of fault in a car accident and injured parties can sue the at-fault party for uncovered claims. Sometimes, though, to determine the party at fault, drawn-out and expensive court battles are necessary. Thirteen of the 50 states in the U.S. have tried to reduce this issue by implementing varying degrees of a “no-fault” system for auto insurance. States are generally considered to be “no-fault states” are Utah, Pennsylvania, North Dakota, New York, New Jersey, Minnesota, Michigan, Massachusetts, Kentucky, Kansas, Hawaii, Florida and Colorado.

Under a no-fault system, each insurance company automatically pays for damage and injuries caused to the insured party by an auto accident regardless of who was at fault. Payments can’t exceed your policy limit, but are paid quickly. No-fault insurance has the goal of lowering insurance costs by avoiding expensive litigation over who was at fault for accidents, as well as to provide quick payments to the insured for injuries. However, the hassle-free claim comes at a price: your rights sue the other party who may have been at fault are limited (or given up altogether). 

Pure No-Fault System vs. Modified No-Fault System

There are two different types of no-fault insurance. Under a pure no-fault system, economic damages incurred by you would be paid for by your insurer up to your policy's limit. In turn, you would be prohibited from suing the other party for damages that are considered non-economic, such as loss of companionship, pain and suffering, etc. At this present time, none of the "no-fault" states function under a pure no-fault system.

Rather, all thirteen of the current no-fault states in the U.S. use a modified no-fault system. Economic damages are still paid up to your policy limit, but you may be permitted to sue the at-fault party for non-economic damages, if the damage amount surpasses a particular pre-determined monetary or "verbal" threshold.

• Verbal threshold: States that operate under a verbal threshold only allow lawsuits for non-economic damages for very serious injuries (i.e., permanent disability or disfigurement) or accidents that result in death. The term “serious” is different from one state to the next, but usually requires severed limbs, broken bones, etc. If you don't meet your state's criteria, then you are prohibited from suing the other party.
• Monetary threshold: States that operate under a monetary threshold only allow for lawsuits for non-economic damages if a pre-determined dollar amount is surpassed.

No-Fault System – The Pros

Those that support no-fault insurance frameworks say that the system offers a number of benefits, such as:

• Reduced number of lawsuits.
• Quicker payout of claims.
• A decrease in auto insurance rates due reduced legal fees (which, in traditional tort states, account for about 12% of premiums).
• No need to subsidize uninsured motorists: your medical bills are covered by your own insurer and not the at-fault party’s insurer (who may not exist in the case of uninsured motorists).

No-Fault System – The Cons

Critics of the no-fault system argue as follows:

• Limited compensation for paralysis, pain and suffering or any other damages, that are considered non-economic, even if the injured party was not at fault.
• Reckless drivers are cannot be sued for damages, removing the economic incentives to drive safely.
• Insurance rates are actually higher in no-fault states (25% higher than tort states). Although one possible explanation is that higher cost states implemented no-fault in an effort to reduce insurance rates.
• Your policy limits put a hard cap on your economic damages. In traditional tort states, your loss can in theory be fully compensated because you can sue the responsible party for your damages above your insurance coverage limits. But in most no-fault states, individuals are required to pay their own uncovered medical bills without the option to sue the driver who caused the said injuries.

Choice No-Fault

In three U.S. states – Kentucky, New Jersey, and Pennsylvania – policyholders are allowed to select between traditional tort and no-fault recovery systems. In these states, known as “choice” or “optional” no-fault states, policyholders must select between “full tort” and “limited tort” (no-fault) options when their auto insurance policy is first issued or renewed. This choice is binding for the duration of the policy. In both Kentucky and New Jersey, policyholders who do not make a choice are assigned the no-fault option by default. In Pennsylvania, the full-tort option is the default selection.

In these states, studies show that good drivers generally choose to retain their rights to sue, while bad drivers choose the less expensive option, which is the pure-no fault. This data would seem to support the claims of those who argue against no-fault regimes, bolstering their main criticism that no-fault systems unfairly reward bad motorists with no personal responsibility or liability while punishing good motorists with higher premium rates.