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In its broadest sense, no-fault insurance is any type of insurance contract under which the insured party is indemnified by their own insurance company for losses, regardless of the source of the cause of loss. In this sense, it is no different from first-party coverage. The term "no-fault" is most commonly used in the context of state or provincial automobile insurance laws in the United States, Canada, and Australia, wherein a policyholder and their passengers are reimbursed by the policyholder's own insurance company without proof of fault, and are restricted in their right to seek recovery through the civil-justice system for losses caused by other parties. 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.
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No-fault systems generally exempt individuals from the usual liability for causing bodily injury if they do so in a car collision; when individuals purchase "liability" insurance under those regimes, the insurance covers bodily injury to the insured party and their passengers in a car collision, regardless of which party would be liable under ordinary legal tort rules. No-fault systems often grant "set" or "fixed" compensation for certain injuries regardless of the unique aspects of the injury or the injured party. Workers' compensation funds typically are run as no-fault systems, usually with 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 often can't and won't end up paying for their liability, so in regions with many uninsured motorists, no-fault systems may make more sense; furthermore, traditional insurance is regressive because drivers of inexpensive cars are liable for damage to any car, no matter its value, even though they themselves add only a small amount of liability to the pool with their less valuable cars. This issue is fixed under a no-fault regime.[according to whom?]
Critics of no-fault argue that dangerous drivers not paying for the damage they cause encourages 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: 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.
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." 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. Empirical analyses were published showing the financial impact of automobile accidents. 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, which consisted of two chapters of the book that they would publish the following year. 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."
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. 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 a unanimous decision. 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.
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. An additional 8 states have an "add-on" system in which the insured party retains the right to sue. In 2012, RAND Corporation published a study which found that costs were higher in no-fault systems. 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 insured parties (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 seriously injured claimants may be barred from compensation where their injury does not match their state's threshold definition language.
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 party 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, while in Pennsylvania the full-tort option is the default.
24 states originally enacted no-fault laws in some form between 1970 and 1975; several of them have repealed their no-fault laws over time. Colorado repealed its no-fault system in 2003. Florida's no-fault system sunsetted on 1 October 2007, but the Florida legislature passed a new no-fault law which took effect 1 January 2008. Michigan, which has had the highest auto insurance rates since 2015, has proposed legislative changes several times since 2018 in hopes of making a more affordable system, but none has passed into law.
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, and such policies pay the medical bills for drivers and their companions no matter whose fault the collision was.
US states and Canadian provinces with no-fault laws
- Pure no-fault
- Qualitative threshold
- Quantitative threshold
- Choice no-fault
- Accident Compensation Corporation in New Zealand
- Transport Accident Commission in Victoria, Australia
- No-fault liability
- Saskatchewan Government Insurance, Press Release - Choices in Auto Insurance.
- Marryott, Franklin J. (July 1966). "The Tort System and Automobile Claims: Evaluating the Keeton-O'Connell Proposal". American Bar Association Journal. 52 (7): 639–43, 639. Retrieved September 13, 2016 – via HeinOnline.
- See, e.g., Calabresi, Guido (March 1961). "Some Thoughts on Risk Distribution and the Law of Torts". Yale Law Journal. 70 (4): 499–53. Retrieved September 13, 2016 – via HeinOnline.
- See, e.g., Morris, Clarence; Paul, James C. N. (May 1962). "Financial Impact of Automobile Accidents". University of Pennsylvania Law Review. 110 (7): 913–33. Retrieved September 13, 2016 – via HeinOnline.
- Keeton, Robert E.; O'Connell, Jeffrey (December 1964). "Basic Protection—A Proposal for Improving Automobile Claims Systems". Harvard Law Journal. 78 (2): 329–84. Retrieved September 13, 2016 – via HeinOnline.
- Keeton, Robert E.; O'Connell, Jeffrey (1965). Basic Protection for the Traffic Victim: A Blueprint for Reforming Automobile Insurance. Boston: Little, Brown. LCCN 65028434.
- Ward, Greg (May 6, 1971). "No Fault Auto Insurance Faces Constitutionality Test Today". Harvard Law Record. 52 (10): 8–9, 15. Retrieved September 13, 2016 – via HeinOnline.
- Pinnick v. Cleary, 360 Mass. 1, 271 N.E.2d 592 (1971).
- Is no-fault insurance finished? Archived 2013-04-20 at the Wayback Machine
- Anderson et al. (2012). What Happened to No-Fault Automobile Insurance?. RAND Corporation.
- Lawler, Emily (2017-08-03). "4 reasons Michigan keeps topping a list of the most expensive auto insurance in the nation". mlive.com. Retrieved 2019-05-22.
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- "627.737 - Tort exemption; limitation on right to damages; punitive damages". 2013 Florida Statutes. State of Florida. Retrieved 21 June 2014.
- "Motor Vehicle Insurance Information". State of Hawaii, Department of Commerce and Consumer Affairs. Retrieved 21 June 2014.
- "Filing a Motor Vehicle Accident Claim". State of Kansas, Insurance Department. Retrieved 21 June 2014.
- "No Fault (PIP)". State of Kentucky, Department of Insurance. 2010. Retrieved 21 June 2014.
- A Consumer's Guide to No-Fault Automobile Insurance in Michigan (PDF). Lansing: Department of Insurance and Financial Services. 2013. p. 1.
- "Michigan's No Fault Insurance". State of Michigan.
- "65B.51 DEDUCTION OF COLLATERAL BENEFITS FROM TORT RECOVERY; LIMITATION ON RIGHT TO RECOVER DAMAGES". 2013 Minnesota Statutes. State of Minnesota. 2013. Retrieved 21 June 2014.
- "17:28-1.9. - Immunity from liability for certain auto insurance providers". New Jersey Permanent Statutes Database. State of New Jersey. 2014. Retrieved 21 June 2014.
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- Goguen, David (2014). "North Dakota No-Fault Auto Insurance Laws". AllAboutCarAccidents.com. NOLO. Retrieved 21 June 2014.
- Your Guide to No Fault Coverage (PDF). Regina: Saskatchewan Government Insurance. 2014. pp. 2, 21.
- Ryskamp, Dani Alexis (2014). "Utah No-Fault Auto Insurance Laws & Regulations". AllAboutCarAccidents.com. NOLO. Retrieved 21 June 2014.
- Right-to-sue part of SGI's no-fault plan: [Final Edition] Ehrkamp, Andrew. Star - Phoenix [Saskatoon, Sask] 29 May 2002
- "Saskatchewan". Car Insurance Where You Live. Insurance Bureau of Canada. 2014. Archived from the original on 6 October 2014. Retrieved 21 June 2014.