THE DIFFERENCE BETWEEN "NO-FAULT" AND "FAULT" AUTO INSURANCE
By Nate Lee

The purpose of no-fault insurance laws is to provide basic medical coverage for people injured in car accidents. The idea is that often attempts to figure out who is liable for an accident can drag out while insurers gather information and debate liability. This has sometimes left victims unable to get the treatment they need, or left doctors unable to recover their fees.

To counter this problem, some states have adopted laws specifying that auto insurers doing business in that state must provide certain coverage for medical costs from automobile accidents, regardless of who is at fault. These are called no-fault auto insurance states.

Such no-fault insurance ensures there is at least some coverage available immediately for occupants of vehicles and pedestrians if struck by a vehicle.

The costs covered usually include medical bills, lost wages and, to some extent, replacement services for your car. Replacement services are the costs to pay someone else to do something you would normally do yourself if you weren't hurt. Baby-sitter expenses for a stay-at-home mother would be an example of a replacement cost.

NO-FAULT AUTO INSURANCE

The term "no-fault" auto insurance is often used loosely to denote any auto insurance program that allows policyholders to recover financial losses from their own insurance company, regardless of fault. However, in its strictest form, no-fault applies only to state laws that both provide for the payment of no-fault first-party benefits and restrict the right to sue. This is also called the "limited tort" option. The first party benefit coverage is commonly known as personal injury protection or PIP for short.

Under current no-fault laws, motorists may sue for severe injuries and for pain and suffering only if the case meets certain conditions as outlined by state law. These conditions, known as "thresholds," relate to the severity of injury incurred in the accident. They may be expressed in verbal terms or in dollar amounts of medical bills, a monetary threshold, or a combination thereof.

Some laws also include minimum requirements for the number of days of disability incurred by a claimant relating to the accident. The idea is that high threshold no-fault systems curtail litigation, so they should tend to reduce costs as well as delays in paying claims. Moreover, verbal thresholds in theory should reduce the incentive to inflate claims that may exist when there is a dollar "target" associated with medical expenses.

However, in some states the verbal threshold has been eroded over time by broad judicial interpretation of the verbal threshold language. In fact, PIP coverage has become the target of abuse and fraud by dishonest doctors and clinics that bill for unnecessary and expensive medical procedures, pushing up costs for all parties involved.

HOW NO-FAULT INSURANCE WORKS

"No-fault insurance" is a general term used to describe any auto insurance system that both requires drivers to carry insurance for their own protection, and that places limitations on their ability to sue other drivers for damages.

In an accident, under no-fault laws, your auto insurance company will pay for your damages (up to your policy limits), regardless of who was at fault for the accident. Any other drivers involved will be covered by their auto insurance policies.

Under a pure no-fault system, drivers would be completely covered by their own policy, and would be barred from ever suing another driver for damages.

However, no state uses a pure system. Instead, all "no-fault" states actually use parts of both the no-fault system and the standard liability system (under which you're financially responsible for the cost of damages you cause). States do this by permitting lawsuits in certain cases.

Obviously, it's a good idea to understand your state's requirements before you shop for insurance.

Why require no-fault insurance? It does guarantee every driver immediate medical treatment in the event of an accident, which is a good thing. And it's is also intended to reduce the legal and administrative fees associated with insurance claims. Which, in turn, should mean lower premiums?

Unfortunately, often times the liability issues that remain will actually drive premium costs up.

THE NO-FAULT POLICY

The actual no-fault part of your auto insurance policy is usually called personal injury protection, or PIP. But parts of the policy may come under different names (like OBEL, for "optional basic economic loss").

Different states' PIP packages cover different things, but in general benefits will include most injury-related expenses. The most common benefits are medical costs, loss of wages, and compensation for loss of services, funeral expenses, and death benefits.

The amount and type of PIP required varies from state to state. In Pennsylvania, Kentucky, and the District of Columbia, drivers can actually choose whether or not they want to purchase PIP and drive under the no-fault system. (If not, they operate under the standard liability, or tort, system.)

And remember, because no state is pure no-fault, drivers can always be held financially responsible for the cost of injuries they cause in certain circumstances.

Some states allow injured parties to sue if their injuries meet certain standard for severity, while others allow it when total costs reach a certain dollar level. That's why liability insurance is still so important, and why and every no-fault state requires it. There are currently 12 no-fault States: DC, FL, HI, KS, KY, MA, MI, MN, NJ, NY, ND, PA, and UT.

WHAT NO-FAULT INSURANCE DOES NOT DO

• No-fault insurance does not replace health insurance

If you are injured in a car accident, you can still use your private health insurance. In some states, no-fault insurance will pick up what the health insurance will not pay for, such as co-pays and fees not covered by the plan.

• No-fault insurance is not a free ticket for the person who caused the accident

If there is an accident, the insurers of the vehicles involved will make a liability determination. Even if the at-fault driver does not have auto insurance, the company that pays the no-fault benefits (and the Health Insurer) can recover their losses from that person.

• No-fault insurance is not physical damage insurance

It has no effect on claims for damages to the vehicles involved. If you live in a no-fault state and damage another person's property with your car, you are still held liable and the claims process moves along as it always has.

• No-fault insurance is not a means to provide coverage for all damages

If you cause an accident and don't have collision coverage on your car, you will not be able to recover from the insurer of one of the other vehicles involved. You will pay for your own damages and your premiums will probably still go up.

• No-fault insurance does not cover pain and suffering

It also does not pay for pain and suffering, loss of consortium and other injury-related issues. Nor does it take the place of uninsured or under-insured motorist coverage.

While no-fault has sometimes been touted as a panacea for all accident-related problems, it is actually a fairly limited plan that deals only with very specific issues. As with all insurance-related issues, no-fault coverage varies according to the state in which each vehicle is registered and insured. If you have questions about no-fault in your state, contact your local agent or insurance company.

THE BACKGROUND OF NO-FAULT INSURANCE

Currently, state auto liability insurance laws fall into four main categories:

1.	Those based solely on the traditional tort liability system
2.	Those that require an insurance company to pay first-party (policyholder) benefits, regardless of who was at fault in the accident, but retain the right to sue as in tort liability states
3.	Those that provide no-fault first-party benefits but restrict the right to sue except under certain conditions
4.	Those that provide a choice between the traditional liability system and a no-fault system

These alternative systems have evolved over time as consumers, regulators and insurance companies have looked for ways to lower the cost and speed up the delivery of customer claims for auto accidents, will keeping the costs in check.

In the early 1990s, the concept of "pure no-fault," which prohibits most lawsuits for bodily injury, began to receive a lot of popular support. Pure no-fault addresses the waste of resources and the inequities in the liability system, not to mention the need to provide affordable coverage for medical care and rehabilitation costs.

The first attempt at a pure no-fault system was called the "pay-at-the-pump" approach. This was a scheme to pay for no-fault auto insurance through a fee collected on gasoline sales – and naturally you can imagine how popular this went down with most citizens.

The "pay-at-the-pump" initiative campaign failed in all states where it was considered, including California. But pure no-fault was merged into a variety of legislative proposals in various states. It was also introduced in Congress, but never reached the floor for a vote.

As of late, many auto insurance reformers have proposed the elimination of "non-economic damages" from tort liability coverage. The aim here is to reduce costs, with optional coverage provided as a first-party coverage that would include a pre-determined cap. The savings would come not only from the elimination of coverage but also from the reduced temptation to jack up medical costs tied to non-economic damages. These are generally calculated as a percentage of economic damages.

VARIATIONS ON THE NO-FAULT CONCEPT

Back in the 1960s, the traditional auto liability insurance system drew public ire. Displeasure was expressed not only by insurance consumers but by companies and agencies selling it and by state officials regulating it. The criticism focused on the often costly and lengthy process of determining fault, and hence legal liability, when accidents occurred.

Legislation was introduced in the 1970s in many states that allowed accident victims to recover such losses as medical and hospital expenses, as well as lost income from their own insurance companies. In states that adopted such laws, the emergent areas of contention involved dollar limits often associated with the following areas:

•	Medical and hospital expenses
•	Funeral and burial expenses
•	Lost income and the amount to be paid a person hired to perform essential services that an injured non-income producer is unable to perform or we explained earlier, replacement cost coverage.

Twenty-four states, including the District of Columbia and Puerto Rico, now have laws that allow policy holders to obtain money for auto accidents from their own insurers.

Of these, twelve states and Puerto Rico have placed restrictions on the right to sue either through a monetary threshold or a descriptive or verbal threshold. These are the only true no-fault states.

The states where first-party insurance benefits have been added to the traditional liability system are now known as "add-on" states. In add-on states there are no restrictions on lawsuits. First-party coverage may not be mandatory and first-party benefits may be lower than in true no-fault states. As an example, Pennsylvania, formerly an "add-on" state, started giving consumers the choice between a verbal threshold and no restrictions on lawsuits since July 1990. This is Pennsylvania's second no-fault law. An earlier law was repealed in 1984.

The District of Columbia has neither a true no-fault nor an add-on law. It presents drivers the option of no-fault benefits or fault-based coverage depending on what may be more suitable to them. In the event of an accident, a driver who originally chose to receive no-fault benefits has 60 days to choose whether to receive these benefits or to take the other party to court.

In the late 1980s, Project "New Start" a national nonprofit consumer organization, was created. New Start was devoted to promoting a new auto insurance policy, developing legislation that would offer motorists a choice between a traditional liability-based policy and a strict no-fault policy.

Motorists who chose the no-fault program could decide to purchase personal injury protection (PIP) above the basic limits and also coverage for pain and suffering if they deemed it prudent.

In the first full year after the law took effect, drivers who chose the no-fault policy would have seen their premiums reduced by a significant amount — at least 20 percent of the statewide average premium, according to the plan.

Another version of choice no-fault was known as the O'Connell plan, after University of Virginia Law Professor Jeffrey O'Connell, who, along with Robert E. Keeton, first proposed a no-fault accident compensation system in 1965. This plan allowed a policyholder who chose the tort system and was involved in an accident with a no-fault driver to file a claim under the uninsured motorist provision of the policy. The no-fault driver could not sue and was immune from suits.

A critical decision in developing a choice no-fault system is how the choice law is framed. In New Jersey, applicants for insurance are presumed to have opted for the verbal threshold on lawsuits unless they specifically reject it; in Pennsylvania, the opposite is true.

Pennsylvania policyholders are assumed to want unrestricted access to the courts unless they specifically request the verbal threshold. As a result, more than 85 percent of policyholders in New Jersey have policies restricting lawsuits. By contrast, less than 50 percent have this kind of policy in Pennsylvania, the largest percentage being drivers in Philadelphia, where rates are highest. Again, this is attributed in part, to a high propensity among the city's drivers to file bodily injury claims after an auto accident. More than 55 percent of accidents that cause some physical damage also result in a bodily injury claim, while in other parts of the state the ratio of such claims to physical damage claims is only 17 percent, insurers report.

STATES THAT WENT NO-FAULT AND WHEN

The States that have forms of true no-fault auto insurance and the dates on which the laws originally became effective are provided below:

•	Medical and hospital expenses
•	Funeral and burial expenses
•	Lost income and the amount to be paid a person hired to perform essential services that an injured non-income producer is unable to perform or we explained earlier, replacement cost coverage.
•	Hawaii - September 1, 1974
•	Kansas - January 1, 1974
•	Kentucky - July 1, 1975
•	Massachusetts - January 1, 1971
•	Michigan - October 1, 1973
•	Minnesota - January 1, 1975
•	New Jersey - January 1, 1973
•	New York - February 1, 1974
•	North Dakota - January 1, 1976
•	Pennsylvania, July 1, 1990 (Note: an earlier law passed on July 19, 1976)
•	Utah - January 1, 1974

IS IT GOOD OR BAD?

Cons

In a New York Times article, proponents of the tort liability system, like Ralph Nader – the famous consumer activist – felt that no-fault "doesn't reduce rates and doesn't deter the accountability between perpetrator and victim." He's even been on record as saying "it eliminates pain-and-suffering compensation, which is what makes us different from inanimate objects." However, he is reportedly to have come around on that position.

Mike Gallagher, a partner in the Houston law firm of Fisher, Gallagher, Perrin & Lewis and a former president of the Texas Trial Lawyers Association, noted in an article appearing in the New York Times that no-fault takes away an individual's right to trial by jury. He is on record as saying ''It discriminates against the elderly, the temporarily unemployed, the homemaker and the minor not yet gainfully employed because it places a premium on economic loss and minimizes physical loss.''

Additionally, Carmen Balber, an Op-Ed contributor to the Boston Globe, called the Massachusetts auto insurance system one of the most expensive in the nation because drivers were not responsible for the accidents they caused and therefore everyone else had to absorb the extra costs.

Pros

An article on CarInsuranceRates.com essentially explains it like this: To good drivers, no-fault insurance may seem like a raw deal. After all, if only the negligent party were held responsible for damages, good drivers would file a lot fewer claims right? Moreover, they could expect to pay lower premiums as a result (Is that AllStates stand anyway?). The problem is that without no-fault laws, good drivers have to take the bad ones into court in order to collect. This not only causes massive congestion in the legal system, it greatly adds to the amount of time it takes for injured motorists to their rightful compensation.

By the time all of the lawyer's fees and court costs are added in, the article claims, the end result is that even good drivers may not save much money in comparison to no-fault. Moreover, premiums for bad drivers are often so high that they're unable to afford insurance - which creates a whole new ball of wax.

For these reasons, most experts think that no-fault insurance is a good idea.