No-fault insurance

In its broadest sense, no-fault insurance is any type of insurance contract under which insureds are indemnified for losses by their own insurance company, regardless of fault in the incident generating losses. In this sense, it is no different from first-party coverage. However, the term "no-fault" is most commonly used in the context of state/provincial automobile insurance laws in the United States, Canada, and Australia, in which a policyholder (and his/her passengers) are not only reimbursed by the policyholder’s own insurance company without proof of fault, but also restricted in the right to seek recovery through the civil-justice system for losses caused by other parties.

Description

No-fault systems generally exempt individuals from the usual liability for causing body injury if they do so in a car collision; when individuals purchase "liability" insurance under those regimes, the insurance covers bodily injury of the insured and the insured's passengers caused by a car collision, regardless of which party would be liable under ordinary common law tort rules. No-fault insurance has the goal of lowering premium costs by avoiding expensive litigation over the causes of the collision, while providing quick payments for injuries or loss of property. Further, no-fault systems often grant "set" or "fixed" compensation for certain injuries regardless of the unique aspects of the injury or the individual injured. Workers compensation funds typically are run as "no fault" systems with usually a fixed schedule for compensation for various injuries.

Proponents of no-fault insurance argue that automobile collisions are inevitable and that at-fault drivers are not necessarily higher risk and should not necessarily be punished; moreover, they note that the presence of liability insurance insulates reckless or negligent drivers from financial disincentives of litigation; also, uninsured motorists are often "judgment proof" (i.e., can't and won't end up paying for their liability anyway), so that in regions with high numbers of such uninsured motorists, no-fault systems may make more sense.

Critics of no-fault argue that dangerous drivers not paying for the damage they cause encourages excessive risky behavior, with only raised premiums and a higher risk rating as the potential consequence, and no jury awards or legal settlements. Detractors of no-fault also point out that legitimate victims with subtle handicaps find it difficult to seek recovery under no-fault. Another criticism is that some no-fault jurisdictions have among the highest automobile-insurance premiums in the country, but this may be more a matter of effect than cause (e.g., the financial savings from no-fault may simply make it more popular in areas with higher automobile-collision risk, or high insurance rates may cause more drivers to go uninsured, increasing the attraction of a no-fault system).

Origins

The number of traffic accidents causing fatalities and debilitating injuries had become by the mid-1960s the source of a litigation explosion that was "straining (and in some areas overwhelming) the judicial machinery."^[1] Much legal thinking in academia was devoted to the question of whether the tort system should be replaced with another method of allocating risks of loss from accidents.^[2] Empirical analyses were published showing the financial impact of automobile accidents.^[3] The first comprehensive legislative proposal was put forward by Professors Robert E. Keeton of Harvard Law School and Jeffrey O'Connell, then of the University of Illinois, in a law review article published in the Harvard Law Review,^[4] which consisted of two chapters of the book that they would publish the following year.^[5] The Keeton-O'Connell plan provided that all automobile owners would be required to purchase a new form of insurance, called "basic protection coverage," under which a victim has recourse for his net economic loss against the insurer of his own car, his host's car or, if the victim is a pedestrian, any car involved. Fault is not required to be shown except for of damages in excess of $10,000 for bodily injury, the deductible of $100 for bodily injury and property damage. Recoverable loss under this type of policy does not include pain and suffering and is reduced by damages recovered form other sources. The proposal generated immense discussion in legal and insurance publications with some concluding it was too "revolutionary."^[1]

In 1967 Massachusetts state representative Michael Dukakis, a 1960 graduate of Harvard Law School, introduced a modified version of the Keeton-O'Connell plan in the Massachusetts legislature. The scheme was adopted in 1970.^[6] The law was challenged in court for claimed violations of numerous state and federal constitutional provisions. The scheme was defended by the state attorney general and also Harvard Law School professors Archibald Cox and Philip Heymann in an amicus curiae brief. The Supreme Judicial Court of Massachusetts overruled the objections in an unanimous decision^[7] The decision opened the way for widespread adoption of no-fault automobile insurance schemes, a development that was encouraged by the federal Department of Transportation.^[6]

Overview in United States

Most U.S. states have a "traditional tort" liability system for auto insurance in which recovery is governed by principles of provable negligence. However, twelve U.S. states and the Commonwealth territory of Puerto Rico require policyholders to operate under a "no-fault" scheme in which individuals injured in automobile collisions are limited in their ability to seek recovery from other drivers or vehicle owners involved in a collision^[8] and an additional 8 states have an "add-on" system in which the insureds retain the right to sue.^[8] In 2012, RAND Corporation published a study which found that costs were higher in no-fault systems.^[9] In the case of economic (medical and wage-loss) damages, most no-fault systems permit injured parties to seek recovery only for damages that are not covered by available first-party insurance benefits. In the case of non-economic (pain-and-suffering) damages, most no-fault systems permit injured parties to seek compensation only in cases of exceptionally "serious" injury, which can be defined in either of two ways:

• A quantitative monetary threshold that sets a specific dollar (or other currency) amount that must be spent on medical bills before a tort is allowed. Disadvantages of this threshold are: (1) that it can encourage insureds (and their medical providers) to exaggerate medical costs through over-utilization, and (2) that, unless indexed, it can become ineffective over time because of inflationary effects on medical costs.
• A qualitative verbal threshold that states what categories of injuries are considered sufficiently serious to permit a tort (e.g., death, or permanent disability or disfigurement). The advantage of the verbal threshold is that it removes any incentive to inflate damage amounts artificially 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.

In three U.S. states – Kentucky, New Jersey, and Pennsylvania – policyholders are permitted to choose between traditional tort and no-fault recovery regimes. Under such systems, known as “choice” or “optional” no-fault, policyholders must select between “full tort” and “limited tort” (no-fault) options at the time the policy is written or renewed; once the policy terms are set forth an insured may not change his/her mind without rewriting the policy. In both Kentucky and New Jersey, policyholders who do not make an affirmative choice in favor of either full tort or limited tort are assigned the no-fault option by default; whereas in Pennsylvania, the full-tort option is the default.

Several U.S. states have experimented with and repealed their no-fault laws. Twenty-four 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 the Florida legislature passed a new no-fault law which took effect January 1, 2008.

In terms of damages to vehicles and their contents, those claims are still based on fault. No-fault systems focus solely on issues of compensation for bodily injury. But it also works the other way: policies pay the medical bills for drivers and their companions independent of who was at-fault for the collision.

States/provinces with no-fault laws

• Pure no-fault

Manitoba^[10]

• Qualitative threshold

Florida^[11]

Hawaii^[12]

Kansas^[13]

Kentucky^[14]

Michigan^[15][16]

Minnesota^[17]

New Jersey^[18]

New York^[19]

North Dakota^[17]

Ontario

Pennsylvania^[20]

Quebec (only for bodily injury suffered in automobile collisions)^[21]

• Quantitative threshold

Kansas ($2000 Threshold)^[13]

Kentucky ($1000 Threshold)^[14]

Massachusetts ($2000 Threshold)

Minnesota ($4000 Threshold)^[17]

North Dakota ($2500 Threshold)^[22]

Saskatchewan ($90,000 threshold)^[23]

Utah ($3000 Threshold)^[24]

• Choice no-fault

Kentucky^[14]

New Jersey

Pennsylvania^[20]

Saskatchewan^[25][26]

See also

• Accident Compensation Corporation in New Zealand
• Transport Accident Commission in Victoria, Australia
• No-fault liability

External links

• Saskatchewan Government Insurance, Press Release - Choices in Auto Insurance.
• Kanetix, Description and Examples of No-fault Insurance.

References

• Insurance Information Institute
• 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)