No-fault auto insurance
No-fault auto insurance
sounds like a simple idea -- on paper.
In real life, each
no-fault state has a slightly different twist on the concept, which means you
need to brush up on local no-fault laws to make sure you're properly covered.
the basic premise of no-fault auto insurance: You pay the premium and when you
have an accident, your insurance company pays you for any injuries you sustain.
"Comprehensive and collision, which covers physical damage
to the car, works essentially the same in both no-fault and tort states,"
says Dan Kummer, director of auto insurance for the National
Association of Independent Insurers. The real difference, he says, is who's
paying for any injuries.
When people talk about 'no-fault,'
they often are really talking about the personal injury/lost wages side of things.
Many people will say 'no-fault' when what they are referring to is personal injury
When it comes to physical damage on the car from a consumer
point of view, the two systems work the same. If someone hits you in a no-fault
state, your company pays to fix your car. And may then go after the other guy's
insurance company if they find out it was his fault.
If someone hits
you in a tort state, you can have your insurance company fix it. Or, you can leave
them out of the picture and have the other driver's insurance company handle the
details. That means you would not have to worry about reporting the accident to
your insurance company or paying a deductible.
When it comes to auto insurance, most states fall into one of
three broad categories: a variation of no-fault, tort or some sort of option
that includes no-fault (so-called 'choice states.').
"In a tort system, you have to rely on going through the
at-fault party. In a way you are at the mercy of the other person and their
insurance company to get prompt payment for medical bills and any injuries you
sustained," says Bill Feldhaus, associate professor of risk management
and insurance at Georgia State University.
No-fault was designed as an antidote to the traditional tort system
in which the wronged party would sue the driver responsible for the accident
to recover for bodily injuries. Under a pure no-fault system, neither party
would be able to sue the other. But states are leery of making citizens forfeit
the right to sue. Some set requirements that wronged parties have to meet before
they can sue.
Some states use a monetary threshold, meaning medical claims and
associated damages have to exceed a certain dollar amount. Others use a verbal
threshold, where individuals have to meet the state's definition of a serious
And if the case moves to court, the term '"no-fault' is pretty
misleading. "[Insurance] companies still have to figure out who is at fault
in [both] tort and no-fault states," says Kummer.
So which is the better deal for consumers or insurance companies?
"If you get 20 insurance executives in a room and ask their
opinion on no-fault, you'd probably get half supporting and half who don't,"
One thing is certain, no matter what the system. Clever crooks
find a way around it.
"The problem with no-fault is that there have been a lot
of abuses," says Doug Dean, insurance commissioner for Colorado, which
recently reverted back to a tort system after nearly three decades as a no-fault
state. Premiums went up 20 percent last year alone, Dean says, largely due to
abuses of the no-fault system.
Jeanne M. Salvatore, vice president of consumer affairs for the
Insurance Information Institute, an industry organization, agrees. "No-fault's
intent is wonderful," she says. "But it hasn't always worked."
Pieces of the puzzle
If you want to make sure you have the best coverage for your
needs, you want to find out which kind of system your state has. If you live
in a no-fault or choice state, you need to find out the limits or thresholds
so that you can plan your coverage accordingly.
"It's important everyone understands what's in their policy
and how it works," says Salvatore.
If you live in a no-fault or choice state, here are some categories
of coverage you'll likely encounter:
Personal injury protection (PIP).
This is the portion of the policy that will actually cover medical expenses
and bodily injuries for the people in your car. "All medical expenses of
the driver and passengers are covered up to the limit of liability, regardless
of fault," says Kenneth Kanehiro, CPCU, CPD, CPIA, director of education
for Professional Insurance Agents of Hawaii Inc.
Residual liability coverage. This
is basically insurance to protect your assets if you get sued over an accident,
which is still more than possible in a no-fault state. The more assets you have
to protect -- cash, investments, home, etc. -- the more you'll need. Conversely,
if you're a student with nothing to take, you might be able to get by with the
"The main thing is to look at your financial situation,"
says Kummer. The good news: "The cost of residual liability is much lower
than in a regular tort state," he says.
Uninsured/underinsured motorists coverage.Your
chances of being hit by an uninsured driver are about one in seven, according
to the Insurance Research Council. If you are, and if you exceed your own personal
injury protection, uninsured motorist insurance usually pays you up to the limits
of your own policy, says Kummer. An underinsured component will generally cover
you after you exhaust your own personal injury protection and the other driver's
Saving money in a no-fault system
If you want to save money, make sure you're not doubling
up -- and paying twice -- for the protection you already have. If you're already
paying for a good medical and long-term disability policy through work, you
might be able to make do with the auto minimums required by state law.
"If you already have medical coverage, usually that would
pick up in case of an auto accident," says Kummer. "If you're looking
to cut corners a little bit, this is something to look at."
Jack Hungelmann, author of Insurance
for Dummies, agrees. The medical coverage attached to an auto policy is
"really the only insurance in the auto industry that can duplicate other
personal insurance," he says. "You should [already] have a good major
medical policy and long-term disability coverage.
"Without that, you're basically saying, 'If anything's going
to happen to me in terms of medical bills or lost wages, I'm putting all my
money on this horse,'" he says. Instead, you want to make sure your medical
bills and lost wages are covered whatever the cause.
One caveat: Usually uninsured/underinsured coverage will pay lost
wages, says Kummer. "It's kind of a trade-off, and it's up to the individual
to decide. It really depends on what your employer provides you."
No matter what the laws are in your state, it pays you to be a
smart consumer and get several estimates.
"There are tremendous price differences among companies,
even though you think this is a relatively standard coverage mandated by the
state," says Feldhaus. "It really does pay to shop around."
Dana Dratch is a freelance
writer based in Atlanta.
-- Posted: Sept. 23, 2003