The terminology of “no-fault insurance” is a bit confusing, as it suggests that an accident isn’t anybody’s fault, even if the other party is clearly liable. Really, no-fault insurance means that if you’re in an accident, your own auto insurance provider is responsible for paying medical bills, missed wages due to injuries, and additional loss claims. According to an article published by the Insurance Information Institute (iii), state auto insurance liability laws currently fall into four broad categories: no-fault, choice no-fault, tort liability and add-on. The underlying purpose of no-fault insurance is to lower the costs of auto insurance by taking the small claims out of the courts and each insurance company compensates its own policyholders for the cost of minor-injuries, regardless of who was at fault.

 

Additionally, drivers in no-fault states may sue for severe injuries if the case meets a certain threshold. They can be expressed in descriptive “verbal” terms or in “monetary” terms, dollar amounts of medical bills. The argument against monetary thresholds is that it, in order to sue, a specific dollar amount such as the $2,000 threshold in Massachusetts might set a target to meet in medical bills, whereas verbal thresholds may eliminate the incentive to inflate claims. In traditional tort liability states, there are no restrictions on lawsuits. In “choice no-fault” states, drivers may select a no-fault policy or a traditional tort liability policy. In “add-on” states, drivers receive compensation from their insurance carriers as they would in no-fault states, but there are restrictions on lawsuits.

 

Currently, twelve states and Puerto Rico have “true” no-fault insurance, while 10 states and the District of Columbia have some form of “add-on” no-fault insurance. This begs the question, if half of the states don’t have some form of no-fault insurance, why do we have it in the first place?

 

The Origin of No-Fault Insurance

In an article titled Is No-Fault Insurance to Blame for High Rate, Fraud? published by The Pew Charitable Trusts, it states, “the idea of a no-fault insurance system originated by academics in the 1930s as a way to try to make sure medical benefits were paid quickly to crash victims and not clog the courts with small claims cases.” It wasn’t until the 1960s when “the traditional auto liability insurance systems became the target of public criticism. Dissatisfaction was expressed not only by those purchasing auto insurance but by companies and agencies marketing it and by state officials regulating it. The debate focused on the often expensive and time-consuming process of determining who is at fault–legally liable–when accidents occur…In the 1970s, legislation was introduced in many states, which for the first time allowed accident victims to recover such financial losses as medical and hospital expenses and lost income from their own insurance companies.”

 

While, no-fault insurance may seem advantageous in that it can result in faster claims processing, less frivolous lawsuits, and a lighter court docket, in practice, it has been the subject of criticism, specifically in terms of higher premiums and an increasing risk of auto-insurance fraud. A study by The Rand Corporation looked at “aggregate costs in liability premiums over a 20-year period, focusing on states that maintained a single system–no-fault, add-on, or tort–over the whole period.” They found that liability premiums have been consistently higher in no-fault states and the gap widening over time. By 2004, premiums in states with no-fault were 50 percent higher than those with tort.

 

As several states initially enacted no-fault laws, Georgia, Nevada, Connecticut, Colorado, and Pennsylvania have repealed, though Pennsylvania would later reenact no-fault laws. Additionally, Florida had a temporary repeal & reenactment in October 2007 & January 2008, respectively. Michigan, which has some of the highest rates in the United States, is considering reform.

 

The Rand study looked at Connecticut, Georgia, and Colorado and found that as soon as no-fault was repealed, the premiums dropped by 10 to 30 percent in all three states. The study further states, “The researchers highlighted two main causes for the high cost of no-fault. First, auto insurance pays for a larger number of medical services in no-fault states than in tort states, whether measured as hospital stays or visits to the emergency room, chiropractor, dentist, or psychotherapist. Second, automobile insurance pays more for the same medical services in no-fault states, and this difference has increased over time. Although medical costs were roughly comparable in no-fault and tort states in 1987, within ten years they had more than doubled in no-fault states.”

 

In terms of fraud, the Insurance Information Institute states that Personal Injury Protection (PIP) benefits in no-fault states are often “exploited by fraud rings that include phony pain clinics and corrupt physicians, chiropractors and lawyers.” In Michigan, it’s believed that with no requirement to prove fault, fraudsters can trick the system into quick and easy payouts, which leads to higher premiums. While insurance companies are aware of some element of fraud, investigating each case as well as legally pursuing them can be costly as well, which gets passed on as higher premiums.

 

This returns us to our original question: Why do we have no-fault insurance? The Pew Charitable Trust cites a now seventeen-year-old study by the National Association of Insurance Commissioners (NAIC), the last analyzation of no-fault insurance laws, in which “it concluded that it was unclear whether insurance programs that only require a minimal of bodily injury coverage and still allow drivers to sue over crashes are better than no-fault.”

 

Despite criticisms and studies that show no-fault insurance results in higher premiums, no-fault does have its advocates, such as Josh Hovey, a spokesman for Michigan’s Coalition Protecting Auto No-Fault, which is a group of consumer organizations, patient advocates, healthcare providers, and rehab facilities. Hovey points to property and liability coverages as driving up premiums. Further, he states that only one-third of a driver’s premium goes to the no-fault coverage requirement, “and that amount of coverage is essential to guaranteeing people with major injuries can get the medical care and long term rehabilitation they need. We have patients who have been paralyzed, who have received significant brain injuries, and through rehab that’s been provided, they’re able to in some cases recover and go back to some type of employment.”

 

While this conversation continues across the country, depending on which state you live, you may be required to purchase no-fault insurance. It’s helpful to understand how the no-fault laws govern your auto insurance premiums and how it might affect you in the event of an injury, and hopefully, alleviate the confusion of what “no-fault” means.

 

“True” No-Fault States

 

“Add-On” No-Fault Insurance