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No-fault car insurance: what you need to know

By Posted : 06/15/2016

No-fault auto insurance is mandated in some states, optional in others and not available in the rest. This type of auto insurance refers to any policy in which the driver's own insurer covers:

•    Medical bills
•    Lost income
•    Other injury-related costs

No-fault car insurance benefits are paid regardless of who is at fault in an injury accident. No-fault insurance laws restrict drivers rights to sue for non-economic damages (for example, pain and suffering) when another driver is at fault.

If you're involved in a minor fender-bender and have no-fault insurance, you don't need to file a claim with the at-fault driver's insurer--your own company takes care of your injury-related expenses, subject to applicable deductible, co-payment and coverage limits.

No-fault car insurance states
Why no-fault car insurance exists
How does no-fault auto insurance work?
Advantages of no-fault car insurance
Saving on no-fault auto insurance

No-fault car insurance states

What does it mean to be a no-fault insurance state? There are three approaches that states use to incorporate no-fault auto insurance:

  1. True no-fault states. No-fault states require you to purchase no-fault insurance. This is also called Personal Injury Protection (PIP) insurance. True no-fault states also restrict your ability to sue an at-fault driver.
  2. Optional or "choice" no-fault states. Drivers in optional no-fault states can go with the no-fault system or opt out and choose a traditional tort-liability policy. If you've opted in, you abide by the same rules as drivers in true no-fault states, meaning your ability to sue another driver is limited. At the same time, other drivers can't sue you for minor collisions either.
  3. Traditional liability with PIP states. Some states allow you to add no-fault (PIP) coverage to your traditional liability coverage. In these states, your insurer covers your injury damages regardless of fault, but there are no restrictions concerning lawsuits.

No-fault insurance in Michigan: A special case

According to Michigan’s Department of Insurance and Financial Services, the state requires drivers to purchase no-fault auto insurance that includes the following:

  1. PIP. This is intended to cover all your medical costs, pays up to 85% of your lost income for up to three years (up to $5,398 per month) and can pay your family a death benefit in the event you die. PIP benefits include up to $20 per day to purchase household service providers that you must hire due to injury.
  2. Property protection. Your no-fault auto insurance must pay up to $1 million for damage your car causes to property owned by others.
  3. Residual liability. Insured people are protected from being sued except in special situations.

An overview of coverage, lawsuit restrictions and average premiums is available below:

AL AK AZ AR CA CO CT DC DE FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY
No-fault
Choice
Add-on

Why no-fault car insurance exists

No-fault insurance was proposed back in the 1930s by a group from Columbia University, but the idea got no traction until the 1960s, when lawmakers and the public became concerned about the costs associated with minor injury accidents. Massachusetts approved the first no-fault legislation in 1970, followed by similar laws in a host of other states. At its peak, the no-fault concept was established in 24 states.

In true no-fault states, only accidents in which the medical expenses reach a certain threshold or the injuries meet the state's legal definition of "serious" can be the basis of a lawsuit against the at-fault party. No-fault insurance systems were implemented in an attempt to achieve the following:

•    Quicker payment of claims
•    Victim's reimbursement not split with lawyers
•    Lower insurance rates
•    Fewer lawsuits to defend and reduced legal costs to insurers
•    No subsidizing uninsured motorists

States created a variety of approaches, with varying degrees of success. In some cases, no-fault systems failed to contain costs, and even resulted in higher costs for several reasons:

•    Fraudulent medical claims
•    Litigation did not decrease - instead of suing at-fault drivers, many accident victims switched to suing their own insurers for denied or insufficient reimbursement
•    High coverage limits led to exorbitant payouts
•    Bad drivers were not punished sufficiently to change behavior

Today, only a dozen states and Puerto Rico are still considered no-fault. Other states modified their laws or returned to traditional tort liability systems. Use the Insurance.com car insurance coverage calculator to determine your optimal auto insurance coverage.

How does no-fault auto insurance work?

No-fault insurance only kicks in when you're injured in an auto accident. You don't need to contact the other driver's insurer, file witness statements and police reports, or wait for the other company's decision to pay (or worse, NOT pay). The no-fault process works like this:

No-fault injuries

1.    You are injured in a car accident.
2.    Regardless of who is at fault, you file a claim with your insurer for expenses related to your injuries.
3.    Your insurer reviews your claim and researches the accidents’ circumstances.
4.    Benefits to which you are entitled are paid by your insurer.
5.    You may not sue the at-fault party and he/she may not sue you, unless criteria are met for “serious” damages.

It’s important to note that no-fault is for injuries, not property damage.  If your car is damaged by another driver in a no-fault state, you can still make a claim with the at-fault party’s property damage liability insurer.

What does no-fault insurance cover?

Your policy benefits generally cover your:

1.    Pain and suffering
2.    Inconvenience
3.    Minor disfigurement
4.    Punitive damages*

*Punitive damages are intended to punish another party who behaves irresponsibly.

To be compensated for property damage, such as repairs to your car and other property, you must file a traditional liability or collision claim, and the insurers will investigate and determine who was at fault and who owes whom. If you're not at fault, the other driver's liability policy should cover your damages; if you caused the accident, your own collision coverage should pay. (Note: collision insurance may not be required if you own your car outright; if you want this coverage, you have to purchase it as an option.)

No-fault restrictions on lawsuits

No-fault laws make it harder to sue for non-economic damages, such as pain and suffering for seemingly minor injuries. If you get a whiplash, for example, you're unlikely to meet the threshold for a lawsuit--soft tissue damage is not considered a serious injury.

Some states specify the types of injuries that allow you to step outside the no-fault system and file a lawsuit; these are called "verbal" states because the allowed injuries are described in words. Other states set their thresholds at certain levels of medical costs ("monetary" states) or length of disability.

Paying medical costs in a no-fault state

Some states require that you use your PIP benefits to pay medical costs first, then have your health insurer pick up the rest; other states require you to use your medical insurance first, then use PIP to cover deductibles and non-medical expenses.

In some states, the funds are paid directly to medical providers, while in others, the check goes directly to you.

Will your insurance rates go up if an accident wasn't your fault?

In a no-fault car accident, the term "no-fault" does not mean that no-one cares who's responsible for causing an accident. It just means that injury benefits are paid by each party's insurer without regard to who is at fault. However, both insurers do investigate and assign blame.

No-fault responsible

If the investigation determines that you did not cause the accident, your rate is unlikely to increase. Michigan, for instance, rates drivers by the number of tickets and at-fault accidents on their records.

In some states, even if you're at least partially to blame for an accident, your rates may not increase, if you have not filed any claims during the past few years.

Advantages of no-fault car insurance

Most of the advantages of no-fault car insurance are connected to the limitations on lawsuits. In Southern California, for example, staged accidents happened so frequently that they actually got a name--the "swoop and squat.” Scammers zip in front of an innocent driver and hit the brakes before the victim can create a safe following distance. Then there's a claim for soft-tissue damages and a lawsuit for pain and suffering.

The real pain, though, was being felt by the victim -- a big settlement and a substantial premium increase the likely outcome. Not to mention the risk of injury to the victim caused by the scammer. In no-fault states, it's nearly impossible to sue after a minor mishap, making the whole exercise less attractive for crooks.

In addition, a Rand Corporation study concluded that no-fault insurers reimburse victims at a higher rate. Researchers characterized no-fault as a more "victim-friendly" approach. The study also found that no-fault systems do process claims faster and that consumers were more satisfied with the process.

Saving on no-fault auto insurance

It's vital to understand that just because your state government mandates no-fault insurance coverage, and regulates what insurers charge, it doesn't mean there's no competition for business among auto insurers.

No-fault insurer competitionIt's your responsibility to compare insurance quotes from several companies when choosing insurance coverage. In addition, mandated coverage may not be enough to meet your needs. If you have assets to protect, you may need liability insurance coverage that goes beyond your standard policy, provided by an umbrella policy. If you own your car free and clear, and it's not a pile of junk, consider collision coverage to get it repaired if you're the at-fault party.

"No-fault" doesn't mean "no responsibility." Drive carefully.

­­­­­­­­­Additional reporting by Gina Pogol.

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