The term "no-fault" is used to refer to a variety of methods for handling costs associated with automobile accident injuries. The variations involve modifying the tort liability (at-fault) system where parties try to handle claims in the courtroom and the "guilty" party pays the "innocent" party. Understanding the benefits and limitations of no-fault insurance is a critical issue for both the insurance professional and consumers in those jurisdictions that use no-fault remedies. This understanding is just as important for jurisdictions that are considering modifications.

Generally, automobile liability insurance operates within the common law structure called tort liability. It offers complete protection, assuming adequate limits of insurance are carried, for an insured motorist's legal liability under the law. In order to collect damages, an auto accident victim has to take legal action against another individual or her/his insurance company and prove that person is responsible for the damages/injuries.

A former Chairman of the Insurance Company of North America once summarized the situation (use of tort liability) as follows:

Current criticism of how automobile insurance operates revolves around the following:

Closely related to price complaints are complaints over the availability of auto insurance. Availability depends upon what insurers consider to be necessary rates and what insurance regulators are willing to approve. Significant discrepancies between these positions have a substantial impact on a given state or region's insurance marketplace.

Concern regarding the inefficiencies of the tort liability system mushroomed in the United States during the 1970s. In 1976, Warren Burger, Former Chief Justice of the United States Supreme Court, was greatly concerned about the proliferation of lawsuits throughout the country. He and others believed an impossible burden was being imposed on the courts by the tort liability systems and procedures. Burger proposed reforming the civil justice system and advocated the use of arbitration to settle disputes outside of the courts. Justice Burger estimated that the average tort case costs the taxpayers thousands of dollars and that reducing court caseloads had the potential of reducing insurance costs.

Various opinions and studies have led to the following conclusions about the tort liability automobile insurance reparations system:

• It is not satisfactory to the public because of the inequities in the legal system under which it operates.
  

• It is not satisfactory to the insurance companies because it has not been a profitable enterprise overall. Rising jury awards and the cost of adjusting third party claims have since been a matter of great concern.
  

• It is not satisfactory to both state and federal governments because it constitutes a serious political and administrative problem that can be regulated to no one's satisfaction.

Through thorough examination of the alternatives, the Department of Transportation has identified the ideal compensation system as one that will:

Typically, the proposals and subsequently adopted tort liability remedies involved first-party coverages for medical expenses, hospital expenses and income loss. Many plans established a total limit of expense per accident to which the insurance would apply; others contained no ceiling on the total amount of recovery payable for these losses.

Some no-fault plans reimburse insured persons for economic loss and for hospital, medical and rehabilitation expense arising out of automobile accidents. Economic loss would include present and future wage loss, cost of services such as housekeeping to replace those of the insured, other reasonable out-of-pocket expenses, and damage to property other than automobiles. Payments would be made periodically.

Payments for "pain and suffering" are typically excluded. However, plans often make provision for the compensation of permanent impairments and it is at this point that there is considerable study, discussion and difference in opinion. Either extra payment could be provided under the insurance for serious injury or tort recovery would still be available.

No-fault automobile insurance laws vary among the states that have adopted them. They can be classified into the following three categories:

Briefly, no-fault laws alter the way the tort liability system handles losses involving automobile accidents. No-Fault laws do not restrict the right to sue when there are serious injuries. Pure no-fault statutes restrict or limit the right to recover for "pain or suffering." They substitute a system of compensating victims of automobile accidents on a first party basis. Insurance policies written under such laws reimburse injured persons for economic loss and for hospital, medical and rehabilitation expense arising out of automobile accidents. Economic loss includes present and future wage loss, cost of services such as housekeeping, and other reasonable out-of-pocket expenses.

Although each no-fault law has unique features, certain characteristics are common to all such laws. No-Fault benefits for automobile accidents are usually provided by adding an endorsement to an automobile insurance policy. This endorsement (usually called personal injury protection), through its terms and conditions, explains the benefits to be paid to an injured party. These no-fault benefits address economic loss and make no provision for non-economic loss. Non-economic losses like pain and suffering may be recovered from the responsible party only when the claim exceeds either a specific monetary or verbal threshold (previously described). The following no-fault benefits are typically provided:

Some states require insurers to offer higher, optional no-fault benefits to persons who want additional protection. In addition, some states require insurers to offer optional deductibles that can be used to reduce or eliminate certain no-fault benefits.

Again, states follow modified no-fault laws that bar an injured party from suing for damages unless the injury exceeds the threshold limit. However, laws in various jurisdictions, allow the insurer to subrogate against the negligent motorist's insurance company to recover amounts it has paid. Or the insurer is entitled to be reimbursed for benefits it has paid if there is a tort liability recovery from a third party.

Example: Paul is injured when, as he goes through an intersection, he is struck by Jill, who ran a red light with her SUV. Paul’s insurance company pays him $11,000 for his injuries. The no-fault law in their state allows suits to be filed for damages that exceed $8,000. Paul sues Jill and receives $6,000. Paul then pays his insurer the proceeds. The insurer ends up paying a net amount of $5,000. Paul’s insurer had an additional option. It could have assumed Paul's rights to recovery and sued Jill directly.

No-fault laws typically only apply to bodily injury. Therefore, any restriction on the ability to sue does not apply to damages to property. One exception to this general characteristic is the law in the State of Michigan. In Michigan, automobile owners generally are prohibited from litigation with regard to property damage to their own vehicles. But even in Michigan, damages to property other than vehicles are subject to the tort liability system.

No-fault statutes are presently effective in Colorado, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, Puerto Rico and Utah.

These jurisdictions have enacted statutes that restrict or limit the right to recover for "pain and suffering." They substitute a system of compensating victims of automobile accidents on a first party basis, permitting an injured person to recover from his or her insurance company without reference to fault. Their essential characteristic is that they prohibit lawsuits unless an auto accident results in serious injuries, the qualifying nature of which is spelled out in the law. They alter the tort liability system to a significant degree as it relates to the automobile, but they do not restrict the right to sue when there are serious injuries.

Some states have enacted laws whereby first party "add-on" personal injury coverages must be offered as a supplement to automobile liability insurance covering automobiles or motor vehicles registered or principally garaged in the state. They make provision for add-on coverage for medical expenses, lost income and other economic losses.

There is no "threshold" or limitation on the right to sue as a condition of payment of such benefits. The right to sue is preserved without reservation. The governing laws do not alter, in any degree, the existing tort liability concept. But in making provision for additional coverage for the benefit of injured persons, such laws may represent a positive step toward automobile insurance reform. Reasonable compensation is considered by many to be a practical method of tempering the burgeoning litigation process.

Statutes in some states presently require that insurance companies writing automobile liability insurance offer first party "add-on" benefits coverages to their insureds. The coverages are mandatory in some states. They may be rejected by the insured in others, but in any event, must be made available.

The states in which "add-on" laws are effective at the present time include: Arkansas, Delaware, District of Columbia, Maryland, New Hampshire, Oregon, South Dakota, Texas, Virginia, Washington and Wisconsin.

Proponents of no-fault automobile insurance argue that serious defects exist in a tort liability system that is based on fault and the necessity to prove negligence. These alleged defects are:

Proponents of the tort liability system present persuasive arguments against no-fault laws. These reasons are: