Us Your Story
~ About No Fault ~
NO-FAULT AUTOMOBILE INSURANCE
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
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
Current criticism of how automobile insurance operates
revolves around the following:
delays in payment
alleged "unfairness" of
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.
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
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
1. guarantee payment of basic economic losses to all
accident victims without regard to fault;
2. drastically limit and carefully define intangible
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
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
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
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
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.
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
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
Almost one-fourth of each premium dollar is used to pay
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
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
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
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.