No-fault Insurance - Overview in United States

Overview in United States

Most U.S. states have a "traditional tort" liability system for auto insurance in which recovery is governed by principles of provable negligence. However, twelve U.S. states and the Commonwealth territory of Puerto Rico require policyholders to operate under a "no-fault" scheme in which individuals injured in automobile accidents are limited in their ability to seek recovery from other drivers or vehicle owners involved in an accident. In the case of economic (medical and wage-loss) damages, most no-fault systems permit injured parties to seek recovery only for damages that are not covered by available first-party insurance benefits. In the case of non-economic (pain-and-suffering) damages, most no-fault systems permit injured parties to seek compensation only in cases of exceptionally "serious" injury, which can be defined in either of two ways:

• A quantitative monetary threshold that sets a specific dollar (or other currency) amount that must be spent on medical bills before a tort is allowed. Disadvantages of this threshold are: (1) that it can encourage insureds (and their medical providers) to exaggerate medical costs through over-utilization, and (2) that, unless indexed, it can become ineffective over time because of inflationary effects on medical costs.

• A qualitative verbal threshold that states what categories of injuries are considered sufficiently serious to permit a tort (e.g., death, or permanent disability or disfigurement). The advantage of the verbal threshold is that it removes any incentive to inflate damage amounts artificially to meet some preset monetary loss figure. The primary disadvantage is that broad interpretation by the courts of the threshold can lead to over-compensation.

In three U.S. states – Kentucky, New Jersey, and Pennsylvania – policyholders are permitted to choose between traditional tort and no-fault recovery regimes. Under such systems, known as “choice” or “optional” no-fault, policyholders must select between “full tort” and “limited tort” (no-fault) options at the time the policy is written or renewed; once the policy terms are set forth an insured may not change his/her mind without rewriting the policy. In both Kentucky and New Jersey, policyholders who do not make an affirmative choice in favor of either full tort or limited tort are assigned the no-fault option by default; whereas in Pennsylvania, the full-tort option is the default.

Several U.S. states have experimented with and repealed their no-fault laws. Twenty-four states originally enacted no-fault laws in some form between 1970 and 1975. Colorado repealed its no-fault system in 2003. Florida's no-fault system sunset on October 1, 2007, but the Florida legislature passed a new no-fault law which took effect January 1, 2008.

In terms of damages to vehicles and their contents, those claims are still based on fault. No-fault systems focus solely on issues of compensation for bodily injury. But it also works the other way: policies pay the medical bills for drivers and their companions independent of who was at-fault for the accident. In this regard, no-fault laws keep down insurance fraud.