What's the difference between no-fault and at-fault states?

You may know whether you live in a “no-fault” or “at-fault” car insurance state – but do you know what these terms actually mean?

If you live in a no-fault car insurance state, any medical claims you file for injuries will be paid by your insurance company regardless of who's at fault for the crash -- but your ability to sue for pain and suffering will be limited.

But if you live in a state with "at-fault" or "tort liability" auto insurance, "any harm done to you by another driver makes that driver responsible for the insurance," says Alex Hageli, director of personal lines policies at the Property Casualty Insurers Association of America.

difference between no-fault and at-fault car insurance In no-fault states, you can't seek compensation from the other driver unless your damages (for example, your medical bill costs) exceed levels defined under state law, he adds. So if each party in a collision is automatically reimbursed by his or her insurer, there is less need to go court to determine which insurance company is responsible for damages.

"The goal is to keep these things out of court," says Michael Barry, a spokesman for the nonprofit Insurance Information Institute (III).

Which states have no-fault car insurance?

No-fault auto insurance is in effect in 12 states and Puerto Rico, according to the III.  The no-fault states are:

  • Florida.
  • Hawaii.
  • Kansas.
  • Kentucky.
  • Massachusetts.
  • Michigan.
  • Minnesota.
  • New Jersey.
  • New York.
  • North Dakota.
  • Pennsylvania.
  • Utah.

III says three states of these states-- Kentucky, New Jersey and Pennsylvania -- allow drivers to choose between having a no-fault policy and one based on the traditional at-fault tort liability system.

Kevin Foley, a New Jersey insurance agent, says drivers in no-fault states are generally required to purchase:

  • Personal injury protection (PIP) insurance: This covers your medical costs in the event of an accident. In addition to medical bills, it covers lost wages. If you die, the payout goes to your family, as in a traditional life insurance policy.
  • Property damage liability insurance. This covers the damage you may cause to other drivers. In addition to no-fault states, all states except New Hampshire require property damage liability coverage.

PIP insurance typically covers medical expenses for drivers and their passengers, up to a required level. The amount varies by state. For example, Florida requires each driver to carry at least $10,000 in PIP coverage.

No-fault and at-fault states: When can you sue?

In at-fault states, someone who believes he's sustained pain and suffering because of another driver may sue.

However, according to Foley, drivers in no-fault states are allowed to sue for pain and suffering only if their case meets a set of conditions defined by state law.

For example, in New Jersey, a lawsuit for pain and suffering can't be filed unless the driver or the driver's passengers have suffered one of the following:

  • Death.
  • Permanent disability.
  • Disfigurement.
  • Dismemberment.
  • Loss of an unborn child.
  • Significant scarring.
  • Serious fracture.

In some no-fault states, drivers can't sue for pain and suffering unless their losses reach a cash value threshold set by law. For example, in Hawaii, the minimum limit is $5,000, he says. This means if you have a minimum of $5,000 in medical expenses, you can go to court and sue for pain and suffering.

Exaggerating injuries

Barry says one of the goals of no-fault is to reduce auto accident lawsuits that exaggerate pain and suffering in order to collect greater amounts from insurers. Injured parties are prevented from filing suits unless they can demonstrate that their losses exceed established levels. Some critics say the system has not worked as planned, however.

In February 2010, a study by the Rand Institute for Civil Justice,  a research organization supported by corporations, trade associations, government grants and private foundations, found that in 1987, auto injury accident costs in no-fault states were 12 percent higher than those of other states. By 2004, injury costs in no-fault states were 74 percent greater than in at-fault states.

No-fault state systems

According to the Rand report, drivers that suffer injuries in no-fault states are more likely to seek treatment from medical providers.

This can lead to insurance fraud, Hageli says. Some health care providers in no-fault states may exaggerate a patient’s injuries in order to receive more compensation from insurance carriers.

Efforts to reduce fraud in no-fault states are increasing. In January 2014, the Insurance Journal, a trade publication, reported that PIP insurance premiums in Florida had fallen by about 13 percent since the enactment of 2012 no-fault reform legislation. One part of the form included any requests for payment from medical providers to be reviewed more thoroughly.

According to the National Health Care Anti-Fraud Association, about $68 billion is lost to health insurance fraud every year. This type of fraud then can push up health care costs for consumers.

Michigan is the only no-fault state that offers unlimited medical care. In 2012, Michigan passed reform legislation that made it a felony to recruit people for staged accidents in order to file false medical claims. If you're convicted of medical claim fraud, you face up to 10 years in prison and a fine of $50,000.

Before the new legislation was passed, it wasn’t clear that such activity was illegal in Michigan, says Lori Conarton, a spokesperson for the Insurance Institute of Michigan, a government affairs and public information association that represents insurers who do business in Michigan.

"There wasn’t a law before that was specifically addressed this," she said "This was a gray area."

Robert Hunter, director of insurance for the nonprofit Consumer Federation of America, says no-fault car insurance has turned out to be a magnet for fraud cases.

 "Theoretically it's a tremendous idea, but it hasn't worked the way you would expect," he said.


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