No-Fault Auto Insurance

Because the use of the courts in the United States is expensive and time-consuming, more than half the states, the District of Columbia, and Puerto Rico have no-fault insurance laws in one form or another.

No-fault auto insurance requires that injured parties seek compensation from their own insurance company, regardless of who was at fault for the accident. Generally, lawsuits are not permitted unless they are above a certain threshold. With states that stipulate a monetary threshold, the amount of damages would have to exceed a certain stipulated amount, such as $5000. Some states have a verbal threshold, meaning lawsuits are only permitted in serious cases, such as for death, dismemberment, disfigurement, or permanent loss of a body part or function. People with less serious injuries would not be permitted to sue, but could only collect from their own insurance company.

No-Fault Insurance Plans

No-fault insurance varies widely among the states, but they may be classified into 4 basic types: pure no-fault, modified no-fault, add-on, and choice no-fault.

1. A pure no-fault plan would disallow any lawsuits in connection with an accident. Instead, the injured parties would be required to collect from their own insurers. However, no state has enacted a pure no-fault plan, although Michigan comes closest to this model.
2. A modified no-fault plan allows the injured party to sue only if the amount of damages exceeds either the monetary threshold or verbal threshold, whatever the state law allows. Any amounts for less than that must be collected from the injured parties own insurer.
3. An add-on plan is not considered a true no-fault plan because it allows the parties to sue, including for pain-and-suffering. Injured parties still collect from their ownership insurance companies but they also have the right to sue the negligent driver.
4. Choice no-fault plans allow the insured to choose between the no-fault coverage and pay lower premiums or to pay higher premiums for the right to sue. Only 3 states have choice no-fault plans: Kentucky, New Jersey, and Pennsylvania.

Most states have modified plans with restrictions on the right to sue. The rest have add-on plans or choice no-fault laws.

The no-fault provision is generally provided as an endorsement, called the basic reparations benefits coverage or personal injury protection coverage (PIP). Benefits are restricted to compensating for the injured parties economic loss, including the following:

• medical expenses;
• funeral expenses;
• essential services expenses, such as house cleaning and cooking;
• loss of earnings;
• survivors' lost benefits.

Medical expenses generally have a maximum limit; all payments for the loss of earnings are usually only a percentage of the disabled injured parties' earnings with a maximum limit to both the amount and duration of the payments.

In most states, funeral expenses have a separate limit, but in some states, funeral expenses + medical expenses must be lower than the medical expense limit.

Survivors' lost benefits are paid to the dependents of a deceased party, which may be paid periodically or as a lump sum.

Because the no-fault minimum limits are usually low, some states require insurance companies to offer optional no-fault benefits with limits exceeding the minimum. Insurance companies may also be required to offer optional deductibles to restrict or eliminate some coverage that a driver may not need.

Regardless of what no-fault plans a state has approved, all states allow lawsuits for serious injuries, such as death, dismemberment, disfigurement, or permanent disability. In these serious cases, the injured party can even sue for pain-and-suffering.

No-fault law restrictions generally apply only to bodily damage, because tort lawsuits are expensive and lengthy, but generally, there is much less at stake in property damage. So an injured party can sue the negligent driver for property damage even in a pure no-fault state.

Arguments presented in favor of no-fault laws include the following:

• It is often difficult to determine fault, so in a lawsuit, trying to ascertain fault would take a considerable amount of time, thus delaying payment to injured parties. Payments from the injured party's own insurer would be much faster, since it is not contingent on liability.
• Claim payments are often incommensurate with actual damages. In most jurisdictions in the United States, small claims are often overpaid because many parties settle to avoid the time and cost of litigation while serious claims are underpaid.
• High cost of the tort system. In most lawsuits that go to court, high expenses are incurred. The attorneys of both plaintiffs and defendants received more than a quarter of the premium dollar. Additionally, overhead expenses, commissions and selling expenses, and state taxes and fees consume more than another quarter of the premium dollar. Moreover, the tort system promotes fraudulent and excessive claims, since many people sue in the hope of being paid to avoid the nuisance of a lawsuit.
• Fraudulent claims are those that involve actual fraud, such as staged auto accidents and fake claims that are often supported by doctors, attorneys, and other professionals with a monetary stake in the lawsuit. Excessive claims are the result of inflating the amount of actual damages, especially since the courts often follow a rule of awarding 2 to 3 times the claimant's noneconomic losses over the actual economic losses. So a claimant may get more money by inflating economic claims with the result that noneconomic awards may be considerably higher. Another problem with the tort system is that it allows compensation for pain-and-suffering, yet, it is very difficult to prove and even harder to value.

Proponents of the tort liability system, which probably includes most lawyers, state that there is no need for a separate no-fault law. What is needed is reform of the tort liability system. However, the tort liability system is inefficient because attorneys have a vested interest in the way that it works, by prolonging lawsuits to increase the number of billable hours. The adversarial system in this country greatly increases the time and costs of even minor litigation — auto liability lawsuits are just a manifestation of a generally inefficient and corrupt system that isn't likely to change soon.

Some have argued that the delays in the tort liability system are exaggerated, especially since most cases are settled out of court. However, most cases are settled out of court because defendants, even if they are in the right, want to avoid the time and expense of litigation. In any case, litigation will never be as quick as the payments from one's own insurance company.

Other arguments include: no payment for pain-and-suffering; safe drivers may be penalized since the insurance company must pay regardless of fault.