Who pays for damage in a no-fault state?
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.
Explaining what a no-fault state designation means and how it works
Let's look at an example to make things a bit clearer. Assume you were in a minor accident with another driver, we will call him Tom. Tom ran a stop sign and collided into your car. You suffered injuries that came with $8,000 in medical bills. Under a no-fault system you would submit a claim to your own insurance company who would pay it despite the fact that the accident was completely Tom's fault.
In a tort state, you would submit a claim (or your insurer would) to Tom's insurance company to cover your medical costs since the accident was completely Toms fault. However, if you were deemed to be partially responsible, lets says the accident was 30 percent your fault, the payout (from Tom's insurers) would be reduced by 30 percent, which your insurance company would then cover.
If Tom was uninsured or you (or your insurer) are unhappy with the payout, you can sue. In a true no-fault state you would have to meet a certain threshold to sue and in most no-fault states, this type of accident would not meet that threshold.
This is a basic explanation of how a no-fault state works compared to a tort state but there can be other systems in place, it all depends on where you call home.
No-fault insurance explained compared to others
There are a few different versions of auto insurance, and the state you live in will determine what type of program you have. Here is a quick overview of the various types of auto insurance systems:
No-fault: This auto insurance system is designed to lower the cost of car insurance by removing the ability to sue. When an accident happens, each person involved in the accident is compensated by their own insurance company for small injuries, regardless of who was at fault. Neither driver is allowed to sue the other unless their injuries are serious and meet a certain threshold.
Making things more complicated is the fact that there are also different versions of no fault insurance and differing thresholds that vary by state. The conditions that must be met before a driver can sue are known as the tort liability threshold and can be verbal terms such as severe disfigurement or death or can be a monetary threshold, which kicks in when medical bills cross a specified dollar amount.
In true no-fault states, every driver out on the road must be carrying a Personal Injury Protection (PIP) policy. Coverage provided by a PIP will vary by state but in most it should cover medical fees, lost wages, funeral costs and other out-of-pocket expenses. The major difference between states is the dollar limits on the various coverages.
It should be noted that no-fault insurance refers to injuries and medical bills. If your car was damaged in an accident and you were not at fault the cost to repair your vehicle would fall to the at-fault drivers insurance policy.
Choice no-fault: In these states, drivers have the option between a no-fault auto insurance policy and the more traditional tort policy. Only three states currently have a choice no-fault system. New Jersey and Pennsylvania have a verbal threshold for no-fault claims and Kentucky has a monetary threshold.
Tort liability: This is a more traditional system and there are no restrictions on lawsuits. If you are at fault in a car accident you can be sued by the other driver or any of their passengers for both medical costs and pain and suffering.
Add-on: In these states, drivers can carry a PIP policy and be covered by their own insurance company but there are no restrictions in place regarding lawsuits. These are not considered true no-fault states as they lack the restrictions on lawsuits. In these states, PIP coverage may not be mandatory and the benefits provided may not be as robust as a true no-fault state. Arkansas, Delaware, Washington D.C., Maryland, New Hampshire and Oregon are currently add-on states.
Current no-fault states
The majority of states use a tort system but currently 12 states and Puerto Rico have a true no-fault insurance system in place that restricts the right to sue. These states include:
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
Even among these states, the program details can vary dramatically. Let's have a quick look at a couple of different states to see how their programs vary.
Michigan: Michigan has one of the most comprehensive no-fault auto insurance systems in the United States. It also has the most expensive auto insurance in the country.
Michigan has the most expensive car insurance in the country, according to CarInsurance.com's rate analysis. iMichigan's average annual premium is $2,484, is 83 percent higher than the national average of $1,129.
There are three parts to a Michigan no-fault policy that every driver must carry. 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): If you are injured in a car accident, personal injury protection, part of the no-fault policy, will pay all of your necessary medical bills with no maximum limit. It also covers up to 85 percent of your lost income for up to three years. This figure is revised yearly and as of October 2018, the monthly maximum is $5,700 per month. Injured parties are also entitled to $20 a day for replacement services if they are unable to provide them for their family, this includes things such as yard work or housekeeping.
Property Protection (PPI): This coverage will pay up to $1 million for damage your car does to other people's property. This can include things such as fences, mailboxes, buildings and even landscaping. It will cover damage to a vehicle if that vehicle was parked at the time that you hit it, it does not cover damage to cars you hit that are moving.
Residual Liability Insurance: - While Michigan's no-fault law protects insured persons from being sued as a result of an auto accident, there are some circumstances where a driver can be sued. According to Michigan's official website the following can result in a law suit:
- If you cause an accident in Michigan in which someone is killed, seriously injured, or permanently disfigured
- If you are involved in an accident in Michigan with a non-resident who is an occupant of a motor vehicle not registered in Michigan
- If you are involved in an accident in another state
- You can be sued for up to $1,000 if you are 50% or more at fault in an accident, which causes damages to another person's car, which is not covered by insurance.
A Michigan no-fault car insurance policy will pay out the following if you find yourself in any of the situations described above:
- Up to $20,000 for a person who is hurt or killed in an accident
- Up to $40,000 for each accident if several people are hurt or killed
- Up to $10,000 for property damage in another state
It should be noted that these are the state required minimums and most drivers up their coverage levels. If the damages exceed your policy coverage levels, you are on the hook for the remaining damages.
The big difference between Michigan and other no fault states is the limits. Most no-fault states put a limit on the PIP amount but Michigan guarantees unlimited lifetime medical benefits to auto accident victims. This generous benefit is underwritten by a $192 a year fee (per vehicle) all drivers pay.
Kansas: This no-fault state pays out much less than Michigan for injuries under their no-fault policies which may be why their premiums are much more affordable. According to CarInsurance.com data, the average car insurance in Kansas is $1,242, about $135 less than the national average. Here are a few details of their program.
Kansas PIP minimums are:
- $4,500 per person for medical expenses made necessary by the accident
- $900/month (for up to one year) for disability/loss of income due to a accident
- $25/day for in-home services -housecleaning etc.
- $2,000 for funeral, burial or cremation expenses
- $4,500 for rehabilitation expenses
Like other no-fault states, you can sue if you meet specific thresholds. The thresholds in Kansas are:
You have exceeded your PIP coverage for your medical expenses and your injuries qualify as "serious." In Kansas, "serious injuries" are defined as follows:
- Permanent disfigurement
- Fracture of weight-bearing bone
- Compound, compressed, or displaced fracture of any bone
- Permanent injury
- Permanent loss of a body function.
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. No-fault insurance schemes can be expensive (think Michigan) and often lead to fraud, which ends up pushing up costs for everyone.
High costs can put a serious damper on no-fault insurance. In Michigan, unlimited lifetime medical benefits for accident victims which is underwritten by a $192-per-driver annual fee (it increased in 2018) have been under fire for years but legislators have failed to find a solution which means the pain will likely continue for Michigan drivers.
"Michigan law doesn't allow auto insurers to negotiate discounted services with health providers. It is also difficult to project future medical costs because auto insurers may have to pay benefits for a seriously injured person for the rest of their life. High medical expenses and the unlimited nature of Michigan' no-fault benefits help explain why premiums tend to increase," says Andrea Miller, public information officer at the Department of Insurance and Financial Service in Michigan.
While the intentions of a no-fault system are good (lower costs, quick payment of claims), it can be difficult to get a well-oiled system set up. "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."
Florida is a prime example of where an outdated PIP system has driven up insurance costs and spawned massive fraud. Florida has the third most expensive car insurance in the country with an average premium of $2,050. This is 50 percent more expensive than the national average.
Florida requires all drivers to carry $10,000 of PIP insurance, an amount that has not been increased since 1972. A recent Sun Sentinel article pointed out that the $10,000 cap is worth $1,500 in 2018 dollars and would have to be increased to $66,000 to buy the same amount of treatment it bought in 1979.
Florida's threshold for suing is verbal and includes the following:
- Significant and permanent loss of an important bodily function
- Permanent injury within a reasonable degree of medical probability
- Significant and permanent scarring or disfigurement
Unfortunately, $10,000 is rarely enough to cover the medical bills for even a moderate accident so accident victims attempt to prove their injuries are permanent so they can sue.
"As a result, Florida is essentially operating under an at-fault system now, but one that better serves attorneys and medical providers than auto accident victims," said Florida State Senator Tom Lee in the Sun Sentinel article.
While Florida did put a 14-day limit on seeking treatment after a crash and instituted a $2,500 benefits cap unless a medical doctor, osteopathic physician, dentist or a supervised physician's assistant or advanced registered nurse practitioner determines the injured person has an "emergency medical condition" in 2013, premiums have continued to rise.
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.
Florida and Michigan have certainly paid the price (very high premiums) for no-fault insurance but not all no-fault states suffer the same consequences. Car insurance rates in no-fault states such as North Dakota and Minnesota are consistently lower than average.
Some states have dumped their no-fault insurance
Florida is currently considering a repeal of the PIP law but passage is far from guaranteed. Florida legislators have been considering changes to the system for years but new legislation never seems to get passed. The Sunshine State is not the only state interested in repealing their no-fault insurance plans, plenty of states have already been down that road.
While states grappling with high car insurance 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 "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. Prices have remained stable and according to Insure.com, the average premium in Colorado is now $1,547, which is slightly above the national average but well below what car insurance in Michigan costs.
Colorado replaced its no-fault law with a more traditional tort system requiring motorists to purchase liability insurance that pays out 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.