What is no-fault auto insurance coverage?

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Things to Remember...

  • Auto insurance has become a large financial institution. Insurance companies provide dozens of different policies with different rules, premiums and deductibles
  • There are thirteen states that have adopted a no-fault insurance policy to try to reduce costs
  • Rather than fight a long and costly battle to determine the fault of a driver in a collision, this insurance assigns no fault. It simply automatically pays out for repairs and damages, as well as medical payments and property damage

Millions of people drive millions of vehicles millions of miles every day. With these kinds of numbers, accidents and collisions are bound to happen. This is what makes auto insurance a necessity for every driver, regardless of location, vehicle or personal details.

Auto repairs are costly and time-consuming, and it’s far better to have access to insurance that will pay it off than to be left out in the cold.

Auto insurance has become a large financial institution. Insurance companies provide dozens of different policies with different rules, premiums and deductibles.

Policies vary from person to person and from state to state.

They differ depending on the vehicle. One thing most of them had in common up until recently was the fault system.

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Fault-Based Insurance

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The problem with fault-based insurance is determining who is at fault and to what degree. Every collision is different and there are a large number of possible factors to consider everything from mitigating circumstances to inebriation.

Determining fault in a collision, unless it fault-based-cut, often led to long drawn out and expensive legal battles.

This wastes the time and money of both parties involved and even a reliable auto insurance company. Looking for a way to mitigate this expense, some states have switched to a new type of insurance called no-fault insurance.

No-Fault Insurance States

There are thirteen states that have adopted a no-fault insurance policy to try to reduce costs. These states are:

Colorado, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah.

Each of these states is attempting to use no-fault auto insurance as a means to cut costs for drivers, insurance companies and the court system. So far it seems to be working.

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How No-Fault Auto Insurance Works

The benefit of no-fault auto insurance is just in the name. Rather than fight a long and costly battle to determine the fault of a driver in a collision, this insurance assigns no fault.

It simply automatically pays out for repairs and damages, as well as medical payments and property damage.

The benefit to the courts is that no-fault insurance restricts your ability to sue another driver in a collision. This cuts down on the number of active court cases in the justice system, cutting costs for all involved.

It does, however, limit a driver’s ability to sue for pain and suffering damages.

Different Types of No-Fault Auto Insurance

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There are two main types of no-fault insurance. These two types are pure no-fault insurance and modified no-fault insurance.

A pure no-fault insurance system has the insurance company pay for all economic damage. These include auto repairs, medical bills, and lost wages. All of this is paid for up to the premium limit.

The downside to this program is that you are completely restricted from pursuing a legal course of action regarding non-economic damage.

In other words, you cannot sue for pain and suffering or other personal claims. Currently, none of the states listed above use this pure no-fault system.

The system that states currently use is the modified no-fault system. The modified system has a cheap auto insurance company pay for economic damages up to the premium specified.

However, if the non-economic damages would exceed a certain threshold, you are allowed to sue for the difference. The threshold can be one of two types.

  • Verbal Thresholds limit the non-economic damages you can sue for to serious levels, such as serious injury or death. What this means varies from state to state, but often includes broken bones, severed limbs or other dangerous injuries. The downside to this system is that if you are seriously injured but not seriously enough to meet the threshold, you won’t be able to sue.
  • Monetary Thresholds prohibit you from suing until your medical bills reach a certain level. The potential negative side of this threshold is people making unnecessary trips to their medical provider in order to bump up the bills.

The Benefits and Drawbacks of No-Fault Insurance

No fault auto insurance has a number of benefits, both for the state and for drivers.

  • Insurance pays out faster because there are no legal battles to wade through to determine fault
  • Lawyers are not involved and thus do not siphon off money from the premiums
  • Generally lower auto insurance costs of premiums due to the elimination of legal fees that account for 12% of current premiums
  • Fewer lawsuits clogging the justice system, allowing more important cases through

No-fault insurance has a few drawbacks, however.

  • Pain and suffering are not compensated, and other non-economic damages are arbitrarily limited
  • Poor and reckless drivers cannot be sued for damages, and so have less incentive to drive more safely
  • Insurance premiums can actually end up higher, due to the guaranteed payouts
  • People now sue the insurance companies over payment thresholds instead of fault, meaning the system is still less than ideal

The no-fault insurance concept is a good idea, but it is unfortunately flawed. One possible method of correcting this is what Pennsylvania and New Jersey are implementing, called a choice system.

Under this system, drivers can choose whether they want to be insured under a fault or no-fault insurance system.

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