No Fault Insurance

No fault insurance is a type of insurance that covers the stated risks regardless of the party at fault for the incident that resulted in the loss. In the United States, no-fault insurance is commonly associated with auto insurance. Several states have modified the definition of “no-fault coverage” so that it only applies to first-party medical coverage, which means that the term “no-fault” doesn’t apply to the rest of the coverage offered by the policy. The term “first-party medical” is more accurate, but many companies still use the term “no-fault.”

Overview of No-Fault Coverage in the United States

Most states apply auto insurance through a traditional tort liability system that relies on the principle of negligence as the basis for an award through a lawsuit. In other words, the insurance company covering the party responsible for the accident will pay for most of the damages. Not all states have regulations concerning no-fault coverage, but all major insurance companies offer some form of medical coverage which essentially has the same legal effect as no-fault insurance. First-party medical coverage means that an insurance company still has to pay part of the medical bills related to an accident, even if the covered party wasn’t at fault. Most states allow parties to seek recovery for damages not covered by a first-party medical policy. There are two basic methods used to interpret and apply no-fault coverage:

  • Quantitative Monetary Threshold – A specific dollar amount sets the amount which may be spent on medical bills. Set limits, however, may encourage exaggerated medical claims. Limits could also leave medical bills unpaid if a victim’s expenses legitimately exceed the maximum dollar amount.
  • Qualitative Verbal Threshold – This approach specifically identifies “serious” injuries such as death, permanent disability, or disfigurement. This method discourages inflated claims, but allows a great deal of discretion to the courts as they identify injuries which qualify as serious.

Pros and Cons of No-Fault Coverage

Lower premiums are the strongest argument in favor of no-fault coverage. Since a no-fault policy does not rely on who is to blame, injured parties may be able to avoid delays in payouts. While both insurance companies may need to pay, this type of coverage does not substantially penalize the driver who was not at fault. However, the insurance company of the driver at fault will typically increase that driver’s premium to compensate for the expenses incurred in the accident. Critics of no-fault coverage claim that the approach does not do enough to punish the driver who was at fault for the accident. In addition, drivers with significant medical expenses could have difficulty seeking recovery of expenses that exceed certain limits.

An insurance carrier often presents no-fault coverage as a personal injury protection (PIP) package. Most policies limit the amount of coverage available in the event of an accident. Premiums vary and may cost more in certain areas, especially those areas with a significant number of uninsured motorists. The no-fault option is usually best for minor fender-benders where there is minimal damage. No-fault coverage also eliminates the back and forth haggling between insurance companies over who was at fault. Whether a driver would choose no-fault coverage depends on factors such as the individual’s driving habits.