Question

How does no-fault insurance impact drivers? Answer with details and explanation.

Answer 1

No-fault auto insurance laws require every driver to file a claim with their own insurance company after an accident, regardless of who was at fault. In states with no-fault laws, all drivers are required to purchase personal injury protection (PIP), as part of their auto insurance policies.

In its strictest form, the term 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, the so-called “limited tort” option.

The no-fault system is intended to lower the cost of auto insurance by taking small claims out of the courts. Each insurance company compensates its own policyholders (the first party) for the cost of minor injuries, regardless of who was at fault in the accident. (The second party is the insurance company and the third is the other party or parties hurt as a result of the accident.)

Under a traditional tort system, at-fault drivers are liable for the economic and noneconomic damages they inflict on third parties. In all tort states, such drivers must insure themselves against this potential liability. This insurance comes in the form of third-party bodily injury (BI) and property damage (PD) liability insurance that covers the insured against claims for damages made by third parties up to some specified limit.

Under a typical no-fault system, economic damages from injuries sustained in an accident are covered by a driver’s own insurance, known as personal injury protection insurance, without regard to fault. Thus, compensation for injuries does not depend on the determination of fault; injured parties who were in no way responsible for the accident recover economic damages from their own insurance as does the at-fault driver. Property damages, however, are typically handled under the traditional tort system.

In addition, no-fault systems restrict compensation for non-economic damages. Injured parties must demonstrate that their economic damages exceed some threshold before they are allowed to sue for non-economic damages. In most no-fault states, economic damages must exceed a dollar threshold before the injured party can pursue compensation for non-economic damages.

It is often pointed out, however, that no-fault is not just a rule of liability; no-fault is an insurance system that has much in common with traditional tort insurance. The incentive to drive carefully remains largely unchanged in moving from a tort to no-fault insurance system.

Potential damages to the at-fault driver include property damage, bodily injury, wage loss, and non-economic damages. In both tort and no-fault states, personal collision insurance compensates at-fault drivers for their own property damages, and under neither system are the at-fault driver’s own non-economic damages eligible for compensation. Consequently, no-fault does not differentially affect incentives through its treatment of the at fault driver’s property and non-economic damages.