No-fault insurance overview

No-fault car insurance refers to a type of insurance contract in which a policyholder’s own insurance company is generally responsible for covering property damage and medical costs for the insured, no matter which party is considered to be at fault in the event of an auto accident. Individuals injured in automobile accidents covered by no-fault policies are simply covered for their losses by their own insurance policies rather than forced to seek recovery from the other drivers or vehicle owners involved in an accident. This is in contrast to the traditional “tort system” of automobile insurance, in which liability for causing an accident is based upon proving a driver was negligent or failed to comply with relevant driving rules and regulations. Thus, the question of who caused an auto accident (i.e., which driver failed to stop at a red light, or which driver was speeding) is largely irrelevant under a no-fault system.

Most US states continue to follow the traditional tort liability system for auto insurance coverage. However, twelve states follow some form of no-fault car insurance by either requiring such coverage or allowing drivers the option of securing no-fault insurance policies. These states include Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah.

In general, no-fault car insurance systems limit drivers or insurance companies from suing the other party for damages, even if they were the cause of the accident. The biggest argument in favor of such systems is that they save on litigation costs and therefore drive down insurance premiums. However, some states allow for an exception to this rule: When very severe accidents occur in which the costs of damages exceed a certain threshold, lawsuits to recover additional damages are allowed.

In the United States, whether or not a system of no-fault car insurance is in effect depends upon state law. Proponents of no-fault insurance cite quicker reimbursement times and the avoidance of costly litigation; opponents argue that the system punishes good drivers for the wrongs of bad ones, and note that insurance premiums tend to actually be higher in no-fault states.

Understanding the Discussion

Liability Insurance: Insurance coverage that pays for injury and damages to the other party involved in an accident.

Personal Injury Protection: Insurance coverage that pays for injury and damages to the policyholder, rather than for claims made by the other party involved in an accident.

Policyholder: Someone who pays for and is protected by an insurance policy.

Premium: The fee a policyholder pays for his or her insurance. Usually this is a monthly or quarterly payment.

Threshold: The level to which the costs of an accident, such as medical expenses, must rise before drivers or insurance companies regain the right to sue the party “at fault” for damages.

Tort System: A system of insurance payouts for car accidents that requires legal suits to prove which party was at fault and therefore liable (responsible) for paying for the costs of the accident.

History

The idea of insurance, or paying a premium to protect against possible future damage or loss, has roots that date back to the ancient trade routes in ancient Babylon, Greece, and China. Merchants used various means of spreading or sharing the risk involved in transporting goods over long distances, thus establishing the earliest forms of insurance. In the United States, the history of insurance dates back to the colonial era. The first insurance office was opened in Philadelphia in 1721, again serving mostly merchants who needed some way to offset the unpredictability associated with trade and unfamiliar distribution routes. The notion of purchasing insurance to protect real property (such as houses and buildings) and personal property (e.g., cars and jewelry) came later, with the first fire insurance companies opening in the mid-eighteenth century.

A later concept, closely connected with the invention and rapid popularity of the automobile in the late-nineteenth century, was the idea of liability insurance: Policies that protect policyholders against the damage or loss they may cause to others. Because of the huge potential for harm to innocent third parties such as pedestrians and other drivers, it was not long before various states began making car insurance coverage mandatory for all motorists. Massachusetts led the way with its 1927 compulsory car insurance law.

For most of the twentieth century, car insurance in the United States followed the tort system of liability based upon proven negligence. Under this system, if a driver was proven to have caused an accident through his or her own negligence, that individual’s insurance company was liable for covering the costs associated with the accident. To get this coverage, the policyholder paid premiums and deductibles to the insurance company. Under this tort system, insurance companies frequently had to go to court to prove responsibility, or liability, in the case of an accident, and these litigation costs were passed on to policyholders in the form of higher premiums.

In the 1970s, the idea of “no-fault” car insurance began to gain ground within the American car insurance industry. The idea originally came from the Canadian province of Saskatchewan, which had switched from a tort system to a no-fault system in 1947 in an attempt to reduce the time and money spent on accident litigation.

From the beginning, no-fault car insurance had its detractors. They argued that the existing tort system had served as an effective deterrent against reckless driving and punished motorists who caused accidents. In addition, lawyers tended to oppose the no-fault system because it took away the right to sue for damages.

The insurance industry itself has consistently advocated for no-fault systems as a way of driving down the price of insurance, and has released reports supporting this claim. However, there is still vigorous debate over whether no-fault insurance actually tends to lower insurance premiums for policyholders, or simply lowers costs for insurance companies.

In the 1980s and 1990s, several states that had previously adopted no-fault car insurance systems began reverting to the traditional tort system or introducing thresholds so that in the case of extremely serious accidents people would regain their right to sue. For instance, Colorado repealed its no-fault law in 2003, although lawmakers have been working to reinstate some provisions of no-fault coverage. Nevada, Georgia and Connecticut have also repealed their no-fault laws. Pennsylvania has repealed and then reinstated no-fault laws, and the District of Columbia offers drivers the no-fault option as well as fault-based coverage. In Florida, the state’s no-fault law expired on October 1, 2007, but lawmakers reenacted the law effective January 2008 while adding significant reforms that were designed to minimize fraud.

However, some who favor a totally “pure” form of no-fault car insurance argue that these thresholds are counterproductive and encourage both medical providers and victims to exaggerate costs in an attempt to push them above the policy’s threshold limits so that policyholders may sue to recover these costs. In pure no-fault insurance, the car insurance provider pays for any economic damages (such as medical bills) up to the policy limit and policyholders forfeit the right to sue the negligent driver for “non-economic” damages (such as pain and suffering). In no-fault insurance with thresholds, the auto insurance provider automatically covers damages regardless of fault up to a specified threshold, or financial limit. Therefore, advocates push for a universal, mandatory no-fault system in order to minimize insurance fraud and the costs of litigation.

No-Fault Car Insurance Today

In 1999, Congress considered the Auto Choice Reform Act, a bill that would require all states to choose between pure no-fault insurance or the existing insurance system in their state and no-fault insurance with thresholds. The proposed bill was never passed into law, so states remain free to use either method. In recent years, the no-fault system has come under renewed criticism as a result of a growing wave of insurance fraud. In New York, for example, organized crime rings have been known to take advantage of the no-fault system at work in the state by staging car accidents and subsequently filing fraudulent claims.

Despite the arguments against no-fault car insurance, most Canadian provinces and a dozen US states use either a pure or partial no-fault system. In addition, a few other Canadian provinces are experimenting with a controversial “opt-out” system, in which individual policyholders can either be covered by a tort system or choose to relinquish their right to sue in the event of an accident in exchange for lower premiums. In other regions of the world, New Zealand and Victoria, Australia, have no-fault insurance systems in place that are publicly administered. Otherwise, no-fault car insurance is not very common outside of North America.

These essays and any opinions, information, or representations contained therein are the creation of the particular author and do not necessarily reflect the opinion of EBSCO Information Services.

Bibliography

Books

Anderson, James M., Paul Heaton, and Stephen J. Carroll. The US Experience with No-Fault Automobile Insurance: A Retrospective. Santa Monica: RAND, 2010. Print.

Loughran, David S. The Effect of No-Fault Automobile Insurance on Driver Behavior and Automobile Accidents in the United States. Santa Monica: Rand, 2001. Print.

Phillips, Jerry J., and Stephen Chippendale. Who Pays for Car Accidents? The Fault versus No-Fault Insurance Debate. Washington: Georgetown UP, 2002. Print.

Vaughan, Emmett J., and Therese M. Vaughan. Fundamentals of Risk and Insurance. 11th ed. Hoboken: Wiley, 2014. Print.

Periodicals Douthat, Ross, et al. "'Moral Hazard' on the Road." Atlantic Jan.–Feb. 2005: 54. Points of View Reference Center. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=pwh&AN=15676528&site=pov-live.

Fluegge, Kyle. "No Fault . . . or Your Fault?" Phi Kappa Phi Forum 87.2 (2007): 26. Academic Search Complete. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=26183044&site=ehost-live.

Goodrich, Lawrence J. "Congress Tries to Pare Auto-Insurance Costs." Christian Science Monitor 23 July 1997: 3. Academic Search Complete. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=9707246354&site=ehost-live.

Gusman, Phil. "Fraud: The Glaring 'Fault' in No-Fault." Insurance Advocate 10 Apr. 2006: 21–22. Business Source Complete. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21878141&site=ehost-live.

"No-Fault Insurance: What's That About?" Guelph Mercury 25 Feb. 2014: n. pag. Points of View Reference Center. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=pwh&AN=Q4KGMON2014022527988127&site=pov-live.

Sirignano, Michael A., and Frank Tiscione. "RICO Actions Fight No-Fault Insurance Fraud." TortSource Spring 2015: 1+. Academic Search Complete. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=103720529&site=ehost-live.

Wolman, J. Marshall, and Saba B. Hashem. "Will Health Care Reform Hasten the Demise of No-Fault Insurance?" TortSource Spring 2012: 1+. Academic Search Complete. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=a9h&AN=79554050&site=ehost-live.

Zinkewicz, Phil. "No-Fault Auto Laws: Refuting the Ties to Highway Negligence." Insurance Advocate 8 Sept. 2001: 2+. Business Source Complete. Web. 11 Dec. 2015. http://search.ebscohost.com/login.aspx?direct=true&db=f5h&AN=5229645&site=ehost-live.

Websites and Digital Files

"No-Fault Auto Insurance." Insurance Information Institute. Insurance Information Inst., Feb. 2014. Web. 11 Dec. 2015. http://www.iii.org/issue-update/no-fault-auto-insurance.

"The No-Fault System." Alabama Department of Insurance. Alabama Dept. of Insurance, 2015. Web. 11 Dec. 2015. http://www.aldoi.gov/Consumers/NoFaultSystem.aspx.

North Dakota. Legislative Council. "No-Fault Insurance in Other States." North Dakota Legislative Branch. North Dakota Legislative Council, Jan. 2004. Web. 11 Dec. 2015. http://www.legis.nd.gov/assembly/58-2003/docs/pdf/59149.pdf.