No-fault insurance

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No-fault insurance

No-fault insurance is a type of insurance (typically automobile insurance) where insureds are indemnified by their own insurer regardless of fault in the incident. The term is often applied to any type of policy that allows for a policyholder to be reimbursed by their own insurer without proof of fault, but technically it refers only to state/provincial laws that not only allow for recovery of direct damage but also limit the right of the insured to sue.

 Overview of No-fault insurance

Most U.S. states have a 'traditional tort' liability system for auto insurance where recovery is limited by negligence principles. However, 12 U.S. states and the Commonwealth territory of Puerto Rico give drivers the option to operate under a "no fault" scheme where persons injured in automobile accidents are limited in their ability to sue other drivers or vehicle owners involved in an accident unless their injuries are particularly severe, sometimes referred to as the 'limited tort' option. The limited tort option provides for legal action only for bodily injury, not for property damage.

No-fault insurance allows for injured parties to sue for compensation for pain and suffering only in cases of exceptional severity. There are two definitions of "exceptional severity":

* The descriptive, or verbal threshold definition allows for the insured to define whether or not they have crossed a defined severity line. The advantage of the verbal threshold is that it removes any incentive to artificially inflate damage amounts 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.

* The monetary threshold sets a specific currency amount spent on medical bills before a tort is allowed. While this prevents over-compensation, it does sometimes lead to exaggeration of medical costs.

Also note that not all jurisdictions require that the insured use the no-fault system; in the United States, 3 of the the 12 states with no-fault allow the motorist to reject the threshold and sue. Rejection must be done at the time the policy is written or renewed; once the policy terms are set forth the insured may not change his/her mind without re-writing the policy.

No-fault insurance has the goal of lowering premium costs by avoiding litigation over the cause of the accident, while providing quick payment for injuries. However, critics of no-fault schemes note that it does not punish reckless or negligent drivers in litigation (because many cases don't go to trial), and that it is particularly difficult to sue if a person's injuries leave them with a handicap. Proponents of no-fault insurance point out that auto accidents are inevitable and that at-fault drivers should therefore not necessarily be punished, and that the presence of liability insurance prevents at-fault drivers in tort (or fault) systems from perceiving the lawsuit against them as an incentive to take greater care. Additionally, in regions with high numbers of uninsured motorists, the at fault party often does not have resources to pay their liability, leaving the accident victim with no recourse.

Critics also point out that many no-fault auto insurance jurisdictions have among the highest auto insurance premiums in the country, although no-fault systems tend to be more popular in areas with higher automobile accident risk.

Several US states have experimented with and repealed their no-fault laws. 24 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 a new no-fault law was passed by the Florida legislature, creating a new no-fault system as of January 1, 2008.

In at least one state, New York, the no-fault plan suddenly and unexpectedly led to an enormous flood of litigation beginning around 1995 and continuing unabated to date (2007). As documented by the New York State Insurance Department and by New York's Court of Appeals, a billion-dollar-a-year "no fault fraud industry" has emerged, in which large numbers of people -- mostly immigrants -- are recruited by criminal "rings" to pile into automobiles which are then involved in deliberate or "staged" accidents. The "victims" are then referred to compliant "medical clinics" which supply unnecessary, questionable or redundant treatment and/or medical supplies. Medical bills are sent en masse to no-fault insurers, and when payment is denied, suit is commenced by a number of law firms which apparently specialize in just this kind of claim.

In 2002, the New York State Insurance Department amended the no-fault regulations to shorten the time period in which claims must be reported, from 90 days to 30 days; the new regulations also reduced the time in which medical bills must be submitted to insurers, from 180 days after treatment, to 45 days. According to the Insurance Department, these revised regulations have helped to reduce the number of fraudulent claims.

Nevertheless, no-fault litigation is reported to constitute 25% of all lawsuits filed in the New York City Civil Court.

 States/Provinces with No-Fault Laws

* Pure No Fault

Quebec

* Qualitative Threshold

Ontario
Florida
Michigan
New Jersey
New York
Pennsylvania

* Quantitative Threshold

Saskatchewan
Manitoba
Hawaii
Kansas
Kentucky
Massachusetts
Minnesota
North Dakota
Utah

* Choice no-fault

Saskatchewan
New Jersey
Pennsylvania
Kentucky

 
 References

* Insurance Information Institute [1]
* Jost, K. (1992, May 22). Too many lawsuits?. CQ Researcher, 2, 433-456
* Randall R. Bovbjerg & Frank A. Sloan, No-Fault For Medical Injury: Theory and Evidence, 67 U. Cin. L. Rev. 53 (1998)
 

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