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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.

Here's 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 protection.

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.

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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 injury.

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," says Feldhaus.

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 state minimums.

"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 liability coverage.

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

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