No-Fault Insurance Explained: What Is It? What Does It Mean For You?

If you are involved in an automobile accident and you live in a state that operates under a no-fault system, you can recover financial losses from your insurance company, regardless of fault. Although technically there are 12 states that currently operate under a no-fault system, in three of the twelve states – called “choice states,” drivers have the right to choose a policy based on either the no-fault or tort-based system. In these states (Kentucky, New Jersey, and Pennsylvania), the policyholder retains the rights for accident compensation.

Overall, not one of the 12 no-fault states is actually a “pure” no-fault state. Under a pure no-fault system, if you are involved in an auto accident, neither party can sure the other. The only pure no-fault regions are located outside of the United States. Quebec and Manitoba operate under a pure no-fault system.

In 1971, Massachusetts became the first state in the nation to adopt a no-fault system. Hawaii, Kansas, Minnesota, North Dakota, Utah, Florida, Michigan, and New York soon followed. Under the no-fault system, motorists may sue for severe injuries and pain and suffering under certain conditions called “threshold.” There are two types of thresholds: verbal and monetary. A verbal or “descriptive” threshold is basically a verbal description of the severity of the injury. This means, the injured party will provide a written description of the injury (i.e. scarring, permanent disfigurement, or fractured bones) or the length of the disability (disability of more than 60 days).

Monetary threshold means the severity of the injuries are expressed in dollar amounts of medical bills. With monetary thresholds, before the injured person can take a liability claim to court, medical expenses must exceed a specific dollar threshold. Each state has its own monetary threshold. Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota, and Utah currently have monetary thresholds. Florida, Michigan, New Jersey, and New York currently have verbal thresholds.

Although the vast majority of states follow the tort system, the no-fault system may have one major advantage over the tort system. According to critics of the tort system, tort systems open the door to lengthy and expensive court battles over who is actually at fault in the accident and to what degree the party is at fault. In some cases, these court battles turn out to be nothing more than long, drawn out “he said she said” exchanges that cost taxpayers (and the state) millions of dollars. In spite of this advantage, many states have made only small amendments to their current tort system.

On the other side of the debate, critics of the no-fault system argue that states following a no-fault system have the highest insurance premiums in the country. For example, Massachusetts’ insurance premiums are 37% higher than California – a personal responsibility state. And six states with the largest insurance premium increases between 1998 and 2002 happen to have mandatory no-fault systems. In the end, the tort system seems to be the preferred choice. No state has adopted a no-fault insurance system since 1976.