A (truncated) history of no-fault auto insurance
At its peak, 26 states had adopted no-fault insurance laws in some form. Today that number stands at 12.
Initially conceived in the 1930s and seeing its first real-world use in the 1970s, no-fault auto insurance aims to make compensating auto accident victims quicker and less expensive by keeping relatively small claims out of the court systems by removing the lengthy and costly process of determining who is at fault following an accident.
Under a no-fault system, people hurt in an auto accident file a claim and are compensated by their insurance company, even if the other driver was at fault, according to Consumer Watchdog.
No-fault insurance only covers medical expenses and lost income, which is why it is at times referred to as personal injury protection or PIP for those who are into the whole brevity thing. However, when it comes to covering property damage, the at-fault driver is still on the hook.
The idea came from workers’ compensation and its “grand bargain,” in which workers agree not to sue their employers in exchange for guaranteed benefits in the case of a work injury, while also capping an employer’s liability, according to an article from the Idaho State Bar.
In 1971, Massachusetts became the first state to adopt a no-fault auto insurance law, but 19 other states followed suit by 1974. At the peak of its popularity, 26 states adopted no-fault auto insurance laws in some form. In 1976, Washington D.C., became the last locale to adopt a no-fault auto law.
According to the RAND Corporation, the no-fault concept fell out of favor because it failed to achieve its objective of lowering rates due to big increases in medical claims. RAND researcher James M. Anderson noted no-fault insurance is a “classic example of the law of unintended consequences.”
In 1987, injury costs under no-fault systems were around 12% higher compared with tort-based insurance. By 2004, no-fault insurance costs were 73% more expensive, according to RAND, which reported states with no-fault systems also saw higher claims costs than states that permitted lawsuits.
As it came up short on its cost-cutting mission, support for no-fault insurance swiftly eroded and states began repealing these laws. Today, the only states still using no-fault systems are Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah.
It is important to note that these no-fault insurance systems vary by state and that no-fault insurance currently takes on three forms, according to WalletHub:
- “Pure” no fault: Under this system, each driver’s car insurance carrier pays for their medical claims, regardless of who is at fault. Quote marks added because no state has a true pure no-fault system, as they allow an accident victim to sue in severe cases. How “severe” is defined varies by state
- Choice no fault: Under this system, drivers can select between buying a no-fault policy or a traditional auto liability policy. Currently, three of the 12 states with no-fault laws use this system.
- Add-on no fault: In addition to the 12 no-fault states, eight states and D.C. have an “add-on” system, which allows drivers to add the benefits of PIP coverage to a policy.
Related: