Summary: No-fault automobile insurance describes a system under which a person injured in an automobile accident receives compensation for the economic loss caused by the injuries from his or her own auto insurer, even when another person might be demonstrably at fault and responsible for payment under the tort liability system. No-fault has been a reality in many states in this country for at least two decades.

There are three types of no-fault systems: pure no-fault, add-on plans, and modified no-fault plans. Under a pure no-fault plan, the injured person can not sue for damages at all and collects damages from his or her own insurer; no state has enacted such a plan. Add-on plans pay certain benefits to the injured person without regard to fault. Under modified no-fault plans, the injured person may choose to sue for damages if the claim exceeds a certain threshold, be it a monetary or a verbal threshold.

The essential elements of a no-fault system are: (1) provision of benefits to covered persons regardless of who is at fault in causing the injury; (2) exemption to some degree of no-fault insureds from tort liability; and (3) action to compel the purchase of no-fault coverage on registered automobiles.

This article acts as an introduction to no-fault coverage by discussing the theory of no-fault automobile insurance and by outlining in general terms the basics that make up this type of coverage, the benefits available under the system and the relation of the system to tort liability; the issue of the constitutionality of no-fault is also addressed here. Specific state programs are presented in subsequent sections, although this article does present an illustration of the no-fault system using the North Dakota system as the example.

Topics covered:
Background
Types of laws
Elements of no-fault coverage
No-fault benefits
Property damage
Bodily injury liability
Coordination with other benefits
Illustration of benefits
Tort liability exemption
Recovery by insurer
Payment
Constitutionality

Background

Beginning with the Massachusetts Bodily Injury Law, which took effect on January 1, 1971, the decade of the 1970s saw the development and implementation of no-fault systems for providing benefits to automobile accident victims in over twenty states and the District of Columbia. However, following that decade, some states have rescinded the no-fault system. Nevada repealed its no-fault law effective January, 1980, becoming the first state to take such action. Georgia repealed its no-fault law in 1991. Pennsylvania replaced its no-fault program with a motor vehicle financial responsibility law. Connecticut repealed its mandatory no-fault coverage in January of 1994. Colorado transitioned to a tort system in 2003. Florida's no-fault system sunset on October 1, 2007, but a new no-fault law was passed by the Florida legislature, creating a new no-fault system as of January 1, 2008.

The idea of a reparations system not based on the fault of the person who is responsible for the damage or injury has been a familiar feature of American law and insurance practice since the advent of workers compensation legislation at the beginning of this century. Although a number of early attempts were made at applying the same idea to reparation for injuries and damage caused by automobiles, it was not until the mid-1960s that workable plans for no-fault automobile legislation started to advance.

In 1965, two law professors, Robert Keeton of Harvard University and Jeffrey O'Connell of the University of Illinois , published a proposal for modifying and partially abolishing the tort liability (fault) system of fixing responsibility for the payment of benefits to automobile accident victims. Basic Protection for the Traffic Victim, the Keeton-O'Connell proposal, described a system under which a person injured in an automobile accident would receive compensation for the economic loss caused by the injuries from his or her own automobile insurer, even when another person might be demonstrably at fault and responsible for payment under the tort liability system. As a necessary corollary to this arrangement, Keeton and O'Connell proposed that those who obtained no-fault insurance (insurance that pays regardless of fault) should be immune from tort liability suits up to the amounts for which coverage was provided by such no-fault insurance.

The Keeton-O'Connell proposal did not envision what can be termed a pure no-fault system, that is, a system that imposes no limit on the no-fault benefits offered and that abolishes tort liability for automobile accident injuries altogether. Rather, Keeton and O'Connell proposed compulsory no-fault coverage that would pay up to $10,000 of the economic loss—medical expenses or loss of earnings, for example—suffered by any one covered person and up to $100,000 aggregate per accident. Injured persons would have recourse to legal action against the parties at fault for their injuries beyond the $10,000 level of the no-fault coverage, or if their noneconomic loss—pain and suffering damages—exceeded $5,000.

Keeton and O'Connell outlined a model no-fault statute for implementing the system in Basic Protection for the Traffic Victim. Together with subsequent proposals for no-fault legislation, such as those advanced by the National Association of Independent Insurers, the American Mutual Insurance Alliance, and particularly the National Conference of Commissioners on Uniform State Laws, this example of a modified no-fault system had a formative influence on the drafting of individual states' no-fault legislation.

Types of Laws

There are three types of no-fault laws: pure no-fault, add-on plans, and modified no-fault plans. Under a pure no-fault law, the injured person cannot sue for damages at all. In effect, a law of this type would abolish the tort liability system for automobile accident injuries. The injured person would collect damages only from his or her own insurer. No state has enacted such a statute.

An add-on plan pays certain benefits to the injured person without regard to fault. Some of the so-called no-fault states do not impose restrictions on the right to sue, but the insured must buy first party coverage that would be payable regardless of fault.

Under a modified no-fault law, the key word is alternatives. For example, the injured person may choose to sue for damages if the claim exceeds a certain threshold; the threshold may be monetary or verbal. A verbal threshold gives the right to sue for certain injuries (without consideration of cost), such as loss of life or limb or loss of sight. A monetary threshold allows the injured party to bring suit once expenses from an accident exceed a certain amount. As an another example, the insured may choose between a threshold or no threshold. And the insured may choose the amounts of personal injury protection.

Elements of No-Fault Coverage

While policy provisions for no-fault insurance—like the legislation that mandates them—can be complicated, the essential elements of a true no-fault system as adopted by the states can be identified as follows: (1) provision of benefits to covered persons regardless of who is at fault in causing the injury; (2) exemption (to some degree) of no-fault insureds from tort liability; and (3) action to compel the purchase of no-fault coverage on all registered automobiles.

No-Fault Benefits

No-fault coverage is arranged by endorsing an automobile insurance policy with a form called “basic reparations” or “personal injury protection coverage.” The form spells out the coverages prescribed by the state's no-fault law and identifies the persons to whom coverage applies. While such endorsements are drafted to embody the no-fault provisions mandated by statute, it should be kept in mind that it is the law itself rather than the endorsement language that defines no-fault coverage. Courts in several states have voided endorsement provisions that were held to be more restrictive than those called for by the specific state's no-fault law. See, for instance, Allstate Ins. Co. v. Royal Globe Ins. Co., 481 A.2d 298 (N.J. Super. 1984), in which certain provisions were found to be too restrictive and unenforceable.

Definitions of covered persons vary somewhat from state to state, but virtually all no-fault systems provide first-party benefits in the event of an automobile injury to the named insured, the named insured's spouse and other resident relatives, any permitted user or occupant of a covered auto, and any pedestrian hit by a covered auto. Many states differentiate the coverage that applies within the state itself and that which applies—on a more limited basis—in other territories. Nonrelative occupants or operators of a covered auto and pedestrians are not included as covered persons under the no-fault coverages of certain states for injuries occurring outside the state.

For circumstances in which no-fault coverage under more than one policy would apply, priorities of recovery are established. For example, an occupant of a covered auto or a pedestrian hit by a covered auto may be a no-fault insured and qualify under both the auto owner's and his or her own policies. There are, of course, two basic possibilities: coverage may follow either the injured person or the involved vehicle. Both possible solutions are represented among the laws of the no-fault states. If coverage follows the injured person, then an injured pedestrian or occupant or operator of someone else's automobile would look to his or her own no-fault insurance for coverage rather than to the coverage attaching to the automobile in which or by which the injury occurred. If coverage follows the vehicle, then the no-fault insurance of the owner will have priority in responding to injuries sustained by occupants of the vehicle or pedestrians hit by it. Uninsured injured occupants or pedestrians would also be covered by the no-fault insurance attaching to the vehicle.

Property Damage

Some proposals for pure no-fault systems have advocated the inclusion of coverage for property damage losses and exemption of insureds from tort liability in connection with such losses. But because property damage resulting from automobile accidents is almost always relatively small (usually confined to damage to the vehicles themselves), the extent of such damage can usually be assessed without much difficulty, and the assignment of responsibility for damage to vehicles is almost always settled quickly between insurers when the parties involved have collision coverage, most states have not extended mandatory no-fault coverage to property damage.

Some states, however, did include provisions for property damage coverage in their no-fault statutes when first written. Florida was one example, but the state declared the property damage section of its law unconstitutional in 1973 in Kluger v. White, 281 So. 2d 1 ( Fla. 1973). Michigan declared and still retains a requirement that property damage be included in no-fault coverage; see State Farm Fire and Cas. Co. v. Old Republic Ins. Co. 234 Mich.App. 465 (Mich.App., 1999). The Michigan law abolishes almost all tort liability for property damage to motor vehicles, making the purchase of collision insurance a practical necessity for most automobile owners. A special limited form of collision coverage, sometimes referred to as inverse liability, is available in Michigan; it pays the insured for collision damage only when caused by another driver who would be held at fault under the tort liability system. Delaware is another state that has property damage in its no-fault system, providing, in accordance with the Delaware Code, for payment for accidental damage to property resulting from an accident involving the named insured's covered auto; this property damage coverage is subject to certain declared exclusions and conditions.

Bodily Injury Liability

No-fault insurance is meant to principally cover loss connected with bodily injury. No-fault recovery is characteristically provided for the following divisions (in some states, they will be subdivisions) of economic loss: medical expense, rehabilitation expense, funeral expense, loss of earnings, replacement services expense, and survivors' loss.

Methods of setting minimum required benefit levels vary from state to state. Most states prescribe a minimum overall limit that insurers must offer as no-fault benefits to any one covered person and many also allow insurers to set an aggregate limit for the maximum recovery by all covered persons in any one accident. A state's overall limit per person may be subject to additional internal limits applicable to individual subdivisions of coverage. Some states define the benefit limits of their no-fault systems solely in terms of these internal limits and specify no overall limit per person. Limits for medical expense are stated in terms of a single amount and, additionally, may also be subject to a maximum per-day hospital charge, which may be stated as a set amount or by reference to the usual cost of a semiprivate room. Most states prescribe a time limit within which medical expense must be incurred.

Loss of earnings benefits (also called work loss, lost wages, or disability income benefits) are customarily limited to a stated percentage of the disabled person's monthly or weekly earnings, a maximum monthly or weekly amount, and a duration-of-benefits period, usually one year from the date of disability. Incidentally, when disability income benefits are not to be counted as gross income for federal income tax purposes, an additional percentage is subtracted to maintain a percent relationship to the disabled person's actual take-home pay; this percentage is usually 15 percent to 20 percent.

Replacement services benefits pay the expenses incurred in obtaining necessary services ordinarily performed by a person now injured and unable to perform them (such as housework, home repairs,  or lawn cutting). Survivors loss benefits pay the loss of income (or contribution of other things of economic value) provided by a person killed in an automobile accident. These coverage provisions are made in terms similar to those found in health insurance policies; that is, replacement services are customarily paid for up to a daily limit for a specified length of time (one or two years) and survivors' loss benefits often parallel loss of earnings benefits, usually with an added stipulation that an amount for expense made unnecessary by the death of the decedent be subtracted from the recovery figure.

Funeral expense is included by some states as a subdivision of medical expense, with a specified portion of the limit for all medical expense allotted to it. In other states, it is made a separate coverage with its own internal limit. Funeral expense benefits vary from state to state and are changed occasionally to reflect the effects of inflation.

A number of states require insurers to offer optional increased no-fault benefits that are above the limits that must originally be offered to and purchased by the insured.

On the other hand, a number of states require that insurers offer optional deductibles on no-fault coverage, sometimes in amounts up to or near the mandatory coverage amounts. These deductibles, which may be used to curtail or eliminate certain no-fault coverages altogether, are applicable only with respect to the named insured and resident relatives. They must not be used to limit the recovery of others eligible for coverage under the policy.

Coordination With Other Benefits

As pointed out previously, no-fault benefits are analogous in many ways to health insurance. Because the possibility of duplicated coverage exists for persons with both forms of insurance, state no-fault laws sometimes specify what coverage is to be primary when more than one would apply. Virtually every state law, for example, stipulates that workers compensation benefits be subtracted from the amount due as no-fault benefits. Federal regulations, though, prescribe that Medicare payments not be made to eligible persons injured in automobile accidents “to the extent that payment has been made, or can reasonably be expected to be made” under no-fault coverage.

With respect to other forms of health coverage, however, a number of states make no-fault insurance primary over them. In these states where no-fault is primary, health insurance premiums are reduced accordingly. In contrast, the no-fault law in Michigan makes health insurance primary and requires that insurers providing no-fault coverage apply an appropriate reduction in premium to no-fault policies written for insureds who also have health insurance coverage.

Illustration of Benefits

North Dakota's no-fault system can be used to illustrate the interrelationship of different no-fault benefits and the limits governing recovery under each; this illustration is based on PP 05 83 11 11, the Insurance Services Office endorsement for personal injury protection coverage in North Dakota. The North Dakota no-fault law mandates coverage with an overall maximum limit of $30,000. Additional internal limits apply. Medical and rehabilitation expenses need to be reasonable and necessary and hospital room expenses can not exceed the customary semiprivate rate (unless intensive care is medically needed). An 85 percent of actual income sublimit applies to work loss, up to $150 per week. Coverage for replacement services and survivors' replacement services is $15 per day. Funeral expenses are covered up to $3,500. (For more information on no-fault coverage in North Dakota, see Personal Injury Protection—North Dakota.

A North Dakota no-fault insured who incurs $20,000 in reasonable and necessary medical expenses because of injuries sustained in an automobile accident will have those expenses paid by his or her automobile insurer (regardless of who was at fault in the accident). Moreover, if the insured is a married woman with children, for instance, whose injuries make it necessary to hire a temporary housekeeper and cook for 200 days during the woman's convalescence, no-fault insurance will pay up to $3,000 ($15 x 200) for this expense as well, without exhausting the overall limit. If the injured woman should also be employed, with a weekly income of $500 that is interrupted during the 40 weeks of her disability, then the threefold economic loss of medical expenses, cost of services usually performed by the insured for her family, and loss of income will be covered for a period of time dictated by the $30,000 limit. Having paid the $20,000 cost of medical care, the insurer will be liable for the continuing expense of replacement services and work loss—at the rate of $255 per week ($150 per week for work loss and $15 per day for replacement services)—for a little more than 36 weeks of the insured's convalescence. The remaining $10,000 of coverage available to the insured after payment of medical expense will be exhausted at that point.

Exhaustion of basic no-fault benefits raises the question of where an insured can turn for recovery of the remainder of his or her loss. As noted previously, some states, North Dakota included, require insurers to provide the additional protection of increased limits of liability should the insured choose that option; this additional personal injury protection coverage comes, of course, at the cost of an additional premium.

Tort Liability Exemption

The second essential element of a true no-fault system is tort liability exemption for no-fault insureds. This exemption from tort liability applies with respect to economic loss up to the amounts that are covered (or would be covered) by the required no-fault insurance. By purchasing no-fault insurance, in other words, an insured achieves immunity from claims for the kinds of loss covered by that insurance, up to the amounts covered. Persons whose economic loss exceeds the compulsory no-fault benefit limits may bring suit alleging liability for the excess amount.

No-fault tort liability exemptions also apply to some extent to claims for noneconomic loss, that is, pain and suffering. Before a suit for pain and suffering damages is disallowed, other more objectively measurable expenses must reach a stated threshold point. This threshold varies considerably from one state no-fault law to another. Early no-fault legislation established thresholds related to the amount of medical expense incurred by the injured person; that is, tort liability was abolished with respect to noneconomic loss only if the medical expense involved in the injury was below a specified amount. As examples, Massachusetts established a stated amount threshold of $500, Connecticut's law set a requirement that medical expense not exceed $400, and New Jersey specified a threshold of $200.

It was the experience of some states with relatively low thresholds that such provisions were generally ineffectual in reducing the amount of litigation generated by automobile injuries. For this reason, a number of states adopted or changed to a higher monetary threshold. Others chose to establish a purely verbal threshold in allowing suits for recovery of noneconomic loss. Verbal thresholds base an injured person's right to sue exclusively on the nature and extent of his or her injuries without reference to the amount of medical expense incurred. Verbal thresholds typically refer to injury that results in whole or partial loss of a body member or function, permanent disability or disfigurement, or death. Advocates of a verbal threshold argue that it eliminates the incentive of some injured persons to run up medical bills in order to be able to bring suit.

Recovery by Insurer

Provisions under a no-fault system emphasize that compensation for automobile accident injuries is a matter to be settled between insureds and their own insurers, on a first party basis, and settled without any reference to fault or legal liability.

Replacement of a tort liability system with a no-fault system does not always extend, however, to the relationship between insurers involved in providing no-fault coverage. No-fault states have instituted a variety of mechanisms by means of which an insurer can sometimes recover from third parties the amounts it has paid out as no-fault benefits. These mechanisms are particularly important as they help define the loss claims relationship between automobile insurers under a no-fault system.

First, there is the question of a no-fault insurer's subrogation rights. Having paid no-fault benefits to a covered person, an insurer is subrogated under the no-fault laws of most states to that person's right of recovery against a negligent third party who does not have no-fault coverage and is therefore exposed to tort liability. Alternatively, a state may provide that a no-fault insurer has a lien against the tort recovery of a person to whom it has paid benefits, up to the extent of the benefits paid. Such provisions are merely an attempt to guarantee that injured persons do not use their recourse to the tort liability system—when such recourse exists—in order to duplicate recovery from their no-fault insurers.

In addition to preserving the subrogation rights of insurers against responsible parties who are without tort immunity, some states' no-fault laws also provide for subrogation between insurers in certain situations when there is no ground for tort action between insureds.

The situation arises most often in an accident involving a commercial vehicle or a vehicle heavier than a specified weight. The insurer of a private passenger vehicle, having paid no-fault benefits to a covered person injured in such an accident, may be given the right to recover the amount of the payments from the insurer of the commercial vehicle (vehicle of specified weight) if tort liability could have been assigned in the absence of no-fault legislation. Some state laws simply provide that no-fault insurers may recover amounts paid out by them as benefits from the automobile liability insurer of a negligent party (even a no-fault insured) if the injury for which benefits are paid out occurs in an accident involving two or more vehicles, any one of which weighs at least a stated number of pounds (6,500 is a representative figure). No-fault laws creating special rights of recovery for insurers when an accident involves large commercial vehicles grew out of a recognition that such accidents are more likely than not to be more destructive and produce more serious, more costly injuries.

A few states still provide very broad rights of recovery by no-fault insurers against the insurers of the responsible party. The right of recovery may be triggered only if no-fault benefits paid out exceed a threshold amount, but they apply with respect to the insurer of any at-fault driver, regardless of the categories of motor vehicles involved in the accident. The effect of such broad recovery provisions is to remove the determination of fault and the assessment of financial responsibility from the insureds, their lawyers, and the courts, and assign it as an issue to be resolved among insurers.

Since one of the principal aims of no-fault legislation is to reduce the amount of litigation generated by automobile accidents, the issue of recovery among insurers is customarily settled by binding arbitration among the parties involved. Arbitration procedures are prescribed by the no-fault statutes of most states and agreement to the procedures may be made a condition of an insurer's being licensed to do business in the state.

Payment

Among other significant provisions of state no-fault laws are those prescribing how benefits are to be paid; within what period of time payment must be made for valid claims; what recourse is available to the insured when payment is not made or is overdue; and penalties that may be imposed upon no-fault insurers for late payment of benefits.

No-fault benefits are usually made payable as loss accrues, for example, as expenses are incurred or as interrupted earnings would be paid. Most states also specify the interval at which payment must be made and this is usually monthly or semimonthly.

A time limit is customarily imposed, within which insurers must pay losses for which reasonable proof has been supplied. Insurers may be obligated to pay interest, at a rate specified by law, on overdue benefits. Some states also make provision for the awarding of punitive damages for an insurer's unreasonable refusal to pay or delay in paying no-fault benefits.

Constitutionality

Several states have addressed the issue of the constitutionality of no-fault laws and the courts have accepted the basic concept of no-fault in virtually all of them. Some states where no-fault has been upheld are Florida (although the property damage portion and the good driver incentive fund portion of the law were ruled unconstitutional), Kansas, Kentucky, Massachusetts (the property damage section was repealed), Michigan, and New York . The following paragraph lists some of the decisive cases.

In Manzanares v. Bell, 522 P.2d 1291 (Kan. 1974), the Kansas Supreme Court declared that the Fourteenth Amendment to the United States Constitution and the Bill of Rights of the Kansas Constitution do not forbid a no-fault system. This decision was reinforced by the Kansas Supreme Court in Burriss v. Northern Assurance Company of America, 236 Kan. 326 (1984). In Fann v. McGuffey, 534 S.W.2d 770 (Ky. 1975), a Kentucky appeals court held that Kentucky 's no-fault law did not violate the state's constitution. The court stated that the constitutional protections of due process and equal protection are not violated by the no-fault system and that the state has undoubted authority to place conditions on the use of its highways. This ruling was reinforced by the Kentucky Supreme Court in Jackson v. State Automobile Mutual Insurance Company, 837 S.W.2d 496 (1984). In Shavers v. Kelley, 267 N.W.2d 72 ( Mich. 1978), the Michigan Supreme Court held that the concept of compulsory insurance was an appropriate application of the state's police power. The case of O'Donnell v. State Farm Mutual Automobile Insurance Company, 404 Mich. 524 (1979), by the Michigan Supreme Court reinforced this opinion. And, in Montgomery v. Daniels, 378 N.Y.S.2d 1(1975), a New York appeals court reversed a lower court's decision that no-fault violated an injured party's constitutional right to recover actual bodily injury damages and that such a system precluded whole classes from recovering damages.

On the other hand, there is a state court that has declared a no-fault law unconstitutional. In Grace v. Howlett, 283 N.E.2d 474 (Ill. 1972), the Illinois Supreme Court held that the Illinois no-fault law violated prohibitions against special legislation contained in the Illinois constitution.