Under a no-fault insurance system, when you have an accident, your auto insurance provider automatically pays for your certain damages, regardless of fault, up to a specified limit. This is in contrast to a tort insurance system, in which someone is found at fault for a car accident, even if fault is determined to be 50/50.
List of no-fault states
There are currently 12 states with no-fault auto insurance laws in effect. These states are:
- New Jersey
- New York
- North Dakota
In exchange for this guaranteed payment of no-fault insurance, you must forego some of your rights to sue the other driver involved in the accident. This means you are also protected from being sued in the event you are at fault in an accident.
The type of no-fault insurance required in each state differs. In many states, such as Florida, no-fault basically means you are required to have Personal Injury Protection (PIP), which you use if injured in an accident, no matter who was at fault. So if you were not at fault in an accident, you would place a claim against your own personal injury protection coverage instead of the at-fault party's Bodily Injury Liability. However in the same scenario, damage to your car would still go through the at-fault party's Property Damage Liability coverages.
In Pennsylvania, New Jersey and Kentucky, motorists are allowed to choose between traditional tort and no-fault coverage. These states thus may be referred to as optional or "choice no-fault states." Auto insurance policyholders need to choose between full tort and limited tort (no-fault) options when obtaining their coverage.
Michigan has one of the most comprehensive no-fault auto insurance systems in the United States. There are three basic parts to a Michigan no-fault policy that must be purchased and carried on every vehicle. This basic coverage is referred to by many as public liability and property damage, or PLPD. The 3 parts to the Michigan no-fault policy are: Personal Injury Protection (PIP), Property Protection (PPI) and Residual Bodily Injury and Property Damage Liability (BI/PD). PPI pays up to $1 million for damage you cause to other people's property, such as buildings and fences, but not to other cars unless they were legally parked when you hit them. A basic no-fault policy in Michigan does not pay to repair or replace another car or your own car if it is damaged. Therefore, if you want to have your vehicle covered if it is damaged (by you or another driver) or stolen, you must purchase physical damage coverage of collision and comprehensive.
Certain states have embraced the no-fault system to try and curtail lawsuits. This is done in most no-fault states; your right to sue is prevented or extremely limited unless there are serious injuries or death resulting from the accident. Non-economic damages, such as pain and suffering, can be sought by injured parties in most no-fault systems, but only in cases where serious injuries have occurred.
No-fault reform: why no-fault insurance doesn't always work
Between 1971 and 1976, two dozen states adopted no-fault car insurance laws. Four decades later, spiraling medical costs and rampant fraud have made the system a persistent target for reform.
In New York, for example, proposed changes to state insurance laws go after "medical mills" that bill as much as $50,000 for treatments that are never delivered. In Michigan, unlimited lifetime medical benefits for accident victims -- underwritten by a $175-per-driver annual fee -- are again under fire in a state where voters twice have rejected attempts to overturn the no-fault law.
"A well-working no-fault system is a good auto insurance option for states," says James Whittle, assistant general counsel for the American Insurance Association, a trade organization. But he concedes a well-functioning no-fault system is a challenge to come by. "We find that less and less to be the case."
No-fault insurance particularly has been under the gun in Florida, where fraud is so rampant in some areas that $10,000 worth of personal injury protection can cost thousands of dollars a year. In early May, Gov. Rick Scott signed new measures into law that are intended to reform the system in part by greatly reducing non-emergency treatment.
While states grappling with costs try to repair their no-fault laws, states that have repealed them altogether have seen their premiums plunge.
Colorado let its no-fault law sunset in 2003 because "the governor [Bill Owens] was dissatisfied by it," says Marianne Goodland, spokesperson for the Colorado Division of Insurance.
By 2008, premiums had plummeted by 35 percent, a consultant for the state found. That translated into a savings of $322 per vehicle per year.
Colorado replaced its no-fault law with a more traditional tort system requiring motorists to purchase liability insurance that pays if they injure another person or cause property damage. Motorists must have at least $25,000 of bodily injury liability coverage per person, per accident; $50,000 for all injuries in one accident; and $15,000 worth of property damage liability coverage.
Medical payments coverage also is automatically added to Colorado policies, although motorists can opt out. This insurance covers the first $5,000 of medical expenses caused by an auto accident. Goodland says motorists tend to opt out of if their health insurance will fill that need.
A report by the nonprofit RAND Corp. found that in Georgia, which repealed its no-fault law in 1991, liability premiums almost immediately dropped 20 percent and remained steady. In Connecticut, which repealed no-fault in 1994, the drop was more precipitous, with liability rates tumbling about 31 percent by 2004. (A fourth state, Nevada, repealed its law in 1980.)
The report found the costs associated with medical care in no-fault states was more than 40 percent higher than in states with tort systems in 2007.
Of course, that financial penalty isn't spread evenly.
A dozen states -- Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah -- and Puerto Rico currently have no-fault systems. (Eight other states have no-fault personal injury coverage as an add-on, supplementing whatever damages an injured person receives via a tort system.)
However, not all states with no-fault systems have higher insurance rates. Car insurance rates in no-fault states such as North Dakota and Minnesota are consistently lower than average. On the other hand, Floridians pay an extra $1 billion per year due to fraud-inflated premiums for personal injury protection, a December report by the state's Office of the Insurance Consumer Advocate found.
Rates also can vary by city. For example, in Florida, premiums are many times higher in some cities than in others. (See "How your ZIP code affects your car insurance.")
Under the old law, there were "few or any checks and balances. As a result, good and bad actors profit from the system," Whittle says. Here's what reform looks like under the newly signed changes to Florida law:
- An accident victim must receive treatment for injuries within 14 days, and the care must come in an ambulance or hospital, or from a physician, osteopathic physician, chiropractic physician or dentist.
- The $10,000 medical benefit is paid only if a physician, osteopathic physician, dentist, supervised physician's assistant or advanced registered nurse practitioner determines there is an "emergency medical condition." If it's not an emergency, the medical benefit is limited to $2,500.
- A person must receive follow-up care if referred by a physician, osteopath, chiropractor or dentist, and there's no reimbursement for massage therapy or acupuncture.
While it's possible an injury might become apparent more than two weeks after a wreck, most motorists should be covered by health insurance, Medicaid or Medicare, says Michael Carlson, spokesperson for the trade group Personal Insurance Federation of Florida.
While it's too early to tell what the ultimate financial impact of reform will mean for Floridians, Carlson says consumers "shouldn't be paying these outrageous PIP (personal injury protection) premiums." But the state is already cautioning consumers not to expect too much.
“This projected savings may actually mitigate premium increases, not reduce premiums,” the state's Office of Insurance Regulation warned in August.