No-fault car insurance explained

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Car insurance claims can be contentious. It can take months or even years for a complex claim to be paid - especially if a lawsuit is involved.

That's why many states have adopted no fault" auto insurance laws designed to speed up the claims process and avoid litigation for small and petty claims.

The no-fault system varies slightly by state but generally means your own car insurance company will pay medical expenses and lost wages caused by an accident -- regardless of who was at fault.

In the long run, this system is designed to save money that otherwise would be spent litigating petty claims. It's also intended to help lower car insurance rates.

According to the Insurance Information Institute (III), current no-fault insurance laws allow motorists to sue for severe injuries and for pain and suffering only if their cases meets certain conditions related to the severity of injury.

According to III, 12 states (see list) and Puerto Rico currently have no-fault auto insurance laws.

States with no-fault car insurance
• Florida
• Hawaii
• Kansas
• Kentucky
• Massachusetts
• Michigan
• Minnesota
• New Jersey
• New York
• North Dakota
• Pennsylvania
• Puerto Rico
• Utah

Source: Insurance Information Institute

How no-fault car insurance started

In the 1960s, the traditional auto insurance claims process came under fire in some states. Consumers, car insurance companies and state officials complained about how expensive and time-consuming it was to determine who was at fault after an accident, according to III.

In the early 1970s, several states introduced legislation to fix the problems. No-fault insurance promised to save money by eliminating the inefficiencies of traditional auto insurance claims.

No-fault insurance springs from the notion that if drivers' medical claims are paid by their own insurance companies, regardless of fault, there will be less delay and less fraud.

In addition, limiting the circumstances under which claims for pain and suffering can be filed eliminates many court cases, easing the strain on the legal system.

Traditional vs. no-fault car insurance

With traditional insurance, if you are hit by another driver, you file a claim against that driver's liability insurance carrier. Or, you file a claim with your own carrier and let it pursue the other driver's insurance company.

The two companies investigate to determine:

• Who was at fault
• Reasonable medical expenses for your injuries
• The type of nonmonetary damages to which you are entitled
• Which company is going to pay

If the driver is injured, a long recovery period can delay settlement of the claim and payment of medical bills. Any delays in assigning fault also delay the payout of claims. Drivers who file claims but are not happy with the nonmonetary settlement are free to sue the other driver in court.

In no-fault states, you file a claim with your own car insurance carrier and it pays regardless of fault. The two insurance companies still investigate fault, but only so they can increase the premiums of an at-fault driver or recover your deductible for damage paid under your collision coverage.

You may receive compensation for nonmonetary damages only if your medical expenses meet a minimum level, or your injuries are considered severe enough to meet your state's verbal threshold requirements.

Restrictions on lawsuits

No-fault states states have limitations on nonmonetary damage lawsuits. The limitations are called thresholds and are expressed either in dollar amounts (a minimum dollar amount spent on medical bills) or verbally (certain injuries or levels of disability are specifically spelled out in the law), according to III.

Monetary thresholds range from $1,000 in Kentucky to $4,000 in Minnesota. If an individual's bills exceed these amounts, he or she can sue.

In addition to Kentucky and Minnesota, Hawaii, Kansas, Massachusetts, North Dakota, Puerto Rico and Utah all have a monetary threshold for lawsuits, according to III. Florida, Michigan, New Jersey, New York and Pennsylvania have verbal thresholds.

Some states have no-fault provisions in their car insurance policies but are not considered true no-fault states, according to III. For example, Oregon mandates auto insurance companies provide personal injury protection to pay for "injuries resulting from the use, maintenance, or ownership of an automobile."

However, the state allows a not-at-fault accident victim to sue (without restrictions) the at-fault driver for pain-and-suffering and disability damages.

Thus, while Oregon has a no-fault provision, it is not truly a no-fault insurance state.