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~ About No Fault ~



(May, 2006)

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.

Tort Liability (Fault) Insurance System

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.

Criticism Of The Fault System

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

"Automobile Insurance did not go wrong. It still offers complete protection against a motorist's legal liability under the law. It operates today under the same classic principles of insurance that work, and work well, for your homeowners' policy, your disability insurance and many other standard and well-accepted forms of liability coverage.

What happened was that the law and auto insurance stood still, while the auto itself and its place in American life changed radically. And so has the concept of social justice, with its increased emphasis on financial security for all.

The problem, then, is that the classic principles of the law as applied to the operation of automobiles in general, and of liability insurance in particular, no longer offer a satisfactory solution to a growing social problem.

What is needed is an entirely new approach to the problem presented by the victims of auto accidents, an approach that would harmonize with the thinking and the needs of our modern automobile-oriented society."

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

delays in payment
alleged "unfairness" of settlements
problems dealing with adjusters/insurers
the fact that disputes often must involve lawyers and the courts

Insurance consumers are quite aware that auto insurance premiums have been rising and that they constitute a major item in most families' budgets. Though most people understand that inflationary factors push insurance costs up, and that cost factors such as medical care, legal services and auto repair are outside the control of insurers, the public nevertheless tends to relate rising costs for coverage to shortcomings in the auto insurance system itself.

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.

General Conclusions

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.

Objectives Of A Reform To The Tort System

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

1. guarantee payment of basic economic losses to all accident victims without regard to fault;

2. drastically limit and carefully define intangible damages;

3. eliminate as many lawsuits and as much of the adversary nature of the system as possible;

4. offer maximum opportunity for rehabilitation;

5. continue to be serviced by the private insurance industry; and

6. continue to be regulated by the individual states.

No-Fault Insurance As A Solution

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.

Types Of No-Fault Laws

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

1. modified no-fault laws

2. add-on plans

3. pure no-fault laws

1. modified no-fault laws

Under a modified no-fault automobile insurance law, the right to sue is restricted rather than eliminated. Injured persons are permitted to sue if the claim exceeds either a monetary or verbal (descriptive) threshold. The monetary threshold is usually expressed as dollars of medical cost (such as damages recoverable if medical expenses exceed $4,000). Verbal thresholds may be expressed in definitions describing seriousness of injury (such as damages recoverable only if injury results in significant disfigurement, permanent loss of bodily function or death). Verbal thresholds are also expressed in terms of length of disability caused by injury (such as damages recoverable if medically determined injury or impairment of a non-permanent nature prevents injured person from performing substantially all material acts which constitute normal activity for at least 90 of the 180 days immediately following the accident). But if the claim is below the threshold, the injured party would collect certain benefits from one's own insurer. Verbal thresholds are usually used in the attempt to avoid a major weakness in dollar thresholds. With the latter, it is easy to bump up an amount so that it meets the criteria to sue for losses.

2. add-on plans

Add-on plans pay certain, described benefits to those who are injured in automobile accidents, without regard to fault; but the right to sue is not restricted. This explains the name add-on, as the law adds benefits but takes nothing away. Since the injured party's right to sue is not limited, add-on laws are not actually no-fault laws.

3. pure no-fault laws

With a pure no-fault law, the injured party cannot sue for damages, regardless of the severity of the injury. The tort liability system for bodily injury is abolished and replaced with a system where the injured party receives unlimited benefits from his/her own insurer for such items as medical expenses and loss of wages. To date, no state has enacted a pure no-fault law.

Right To Sue Restricted, Not Eliminated

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.

Characteristics Of No-Fault Laws

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:

1. Medical Benefits: generally includes doctor, hospital and rehabilitation expenses. Most states place a maximum on the level of permitted medical benefits. Such limits are either specified or subject to the limitations on total benefits receivable.

2. Wage Loss Benefits: refers to benefits received for loss of income the victim would have received but for the injury. In most states the amount of wages recoverable is limited to a percentage of the wages that would have been earned in a fixed time period, and/or the total amount of first-party benefits receivable.

3. Replacement Services Benefits: are for services the injured person normally provides for the benefit for family members. Benefits are subject to time period and dollar limits.

4. Survivors' Benefits: generally, survivor benefits include compensation to dependents of the deceased victim for lost wages and replacement services. In most states maximum limits are set by liquidated amounts and/or limits on total benefits recoverable.

5. Funeral Benefits: refers to the amounts recoverable by the victim's survivors for burial expenses. In most states maximum limits are set by liquidated amounts and/or limits on total benefits recoverable.

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 Laws

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.

Add-On Insurance

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.

Add-On Insurance Laws

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.

Arguments In Favor Of No-Fault

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:

1. Difficulty in determination of fault

Automobile accidents often occur suddenly and unexpectedly. However, facts surrounding the cause of automobile accidents may become faded with time or may be suppressed or fabricated by one of the parties. Also, the legal defenses of contributory negligence and last clear chance are difficult to apply. No-fault automobile insurance permits recovery of certain benefits to an injured accident victim without a necessity to determine fault.

2. Inequities in claim payments

Critics argue that smaller claims are overpaid, while larger claims are underpaid. Evidence shows that economic considerations may cause insurers to pay out more for smaller claims in proportion to the actual economic loss, then expend funds for investigation and defense while insurers may vigorously resist larger claims in an attempt to reduce the amount of payment.

3. Limited scope of tort reparations system

Many injured persons do not collect under the present system. A no-fault system will work to compensate those injured in an automobile accident. No-fault compensates more victims more fully. The number of no-fault payouts per hundred insured cars is double that found in traditional (tort liability) jurisdictions. Successful no-fault claimants receive an average of $8,679 in total compensation, 79 percent more than their lawsuit counterparts, according to a study conducted by the U.S. Department of Transportation, "Compensating Auto Accident Victims."

4. Large proportion of each premium dollar paid is used for legal costs

Almost one-fourth of each premium dollar is used to pay claims' costs.

5. Delay in claims payments

Large numbers of claims are not promptly paid because of claims' investigations, negotiations between the insurer and injured parties or their representatives, and the difficulties encountered in waiting for court dates. The more serious the injury, the greater the delay. Thus, the very parties who need to be compensated quickly are not. No-fault laws enable injured parties to receive immediate (or almost immediate) compensation for economic loss.

Payouts are made far more quickly under no-fault. One year after notifying his or her insurance company of an accident, the average no-fault claimant has received more than 95 percent of final compensation. Those forced to resort to the tort system have received just over a half one year after notification to the insurer. Swifter payment facilitates swifter physical recovery through more immediate access to better medical treatment.

6. No-fault is considerably the more efficient system

For example, auto accident victims in Michigan, where no-fault has been implemented in its purest form (high benefits coupled with severe restrictions on court access), receive an average of 14 more cents on their premium dollar. These savings mean that in no-fault states, a greater proportion of insurance money is going where it should—toward rehabilitating the injured, rather than being wasted in useless legal and administrative costs, according to a study conducted by the U.S. Department of Transportation, "Compensating Auto Accident Victims."

7. No-fault systems relieve courts of suffocating caseloads

In the first four years of its no-fault statute, Massachusetts reported a drop of almost two-thirds in the number of automobile negligence suits brought to court (from 30,000 to 11,000 annually). Other no-fault states have witnessed similar dramatic reductions.

Arguments Against No-Fault

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

1. The defects of the current tort liability system are exaggerated

The concepts of negligence, as applied to automobile accidents, have a history of success. The present system is, in fact, working well, as most automobile claims are settled out of court.

2. The allegations that no-fault laws would result in insurance premium savings and greater efficiency are exaggerated.

It is argued by proponents of no-fault that because of alleged efficiencies, the cost of an auto reparations system would be reduced and this cost savings could be passed along to consumers in the form of savings on their premiums. However, the total dollars paid accident victims will not change and, in fact, may increase.

3. The safe driver may be penalized

Rating systems under a no-fault law could allocate the accident costs to the persons not responsible for the automobile accident, but who are the ones paid the benefits. The person actually responsible for the accident may escape any rating "penalty."

4. The accident victim is not compensated for pain and suffering

A no-fault system provides for economic losses. Non-economic losses such as pain and suffering are not recoverable unless the injury exceeds the limit of the threshold.

5. Court delays are not all-embracing

While court delays may exist in selected metropolitan areas, the problem is not universal. While it is agreed this situation should be addressed, it must be handled as its own problem and not as justification for a no-fault system.

6. The present tort system only needs reform

Proponents of the tort system urge reform rather than replacement. Limiting contingency fees for attorneys and using alternative dispute resolutions are examples of revisions that will produce positive results within the current system.




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