No-fault Insurance: How Does it Work?

No-fault insurance isn't well understood by many drivers. This article covers everything you need to know about no-fault insurance -- what it is, which states offer it, what it covers, what it doesn't cover and what happens if your claim exceeds the small claims amount.

What is no-fault auto insurance?

The no-fault system is designed to lower the cost of auto insurance. Because litigation adds significantly to the insurance companies' costs, taking the settlement of claims out of the court system is supposed to cut insurance expenses and reduce rates for drivers. Each insurance company compensates its insured drivers for the cost of minor injuries, regardless of who is at fault in an accident.

Which states offer no-fault auto insurance?

These 12 states offer no-fault auto insurance as an option. In addition to these states, Puerto Rico also offers no-fault auto insurance.

  1. Florida
  2. Hawaii
  3. Kansas
  4. Kentucky
  5. Massachusetts
  6. Michigan
  7. Minnesota
  8. New Jersey
  9. New York
  10. North Dakota
  11. Pennsylvania
  12. Utah

Nine of these states are exclusively "no-fault" and three are "choice" states. In Kentucky, New Jersey and Pennsylvania, drivers can choose a no-fault system policy or a traditional policy.

How does no-fault insurance work?

In no-fault insurance states, your insurance company covers the minor costs associated with an accident, regardless of who caused it. In these states, you are not allowed to sue the other driver, but must go through your insurance company to recoup your costs and settle for damages. In some "no fault" states, there is a limit to the benefits the automobile insurance company will pay. In other no-fault states there is no limit. If your damages and pain and suffering exceed certain limits, you may have the right to sue the party responsible for the accident. According to the Insurance Information Institute, "In New Jersey, Pennsylvania and Kentucky, motorists may reject the lawsuit threshold and retain the right to sue for any auto-related injury.

What does no-fault insurance cover?

No-fault auto insurance is meant to cover minor expenses associated with an accident in order to keep small claims out of the courts. In states with the highest benefits, no-fault auto insurance covers medical fees, lost wages, funeral costs, and other out-of-pocket expenses associated with an auto accident.

What no-fault insurance doesn't cover

Covered losses and damages do not include those for pain and suffering or loss of consortium (loss of your spouse). The term "no-fault" usually refers to personal injury coverage and not property damage. Insurance claims for physical damage to a car or its contents are still based on fault, and handled in the same way as those in states with a fault law. You would need to sue the driver who was "at fault" or negligent. If you have collision insurance, which you should purchase in no-fault states, your property damage would be covered according to that policy.

What happens if damages exceed small claims thresholds?

Among the no-fault states, lawsuits are permitted when injuries meet certain thresholds, which may either defined as a monetary value or by the described seriousness of the injury. The threshold varies considerably from state to state, but if an injured party meets its requirements, he / she may sue to recover damages for pain and suffering.

In monetary threshold states, medical expenses must exceed a specified dollar amount, while with descriptive threshold, injuries must be relatively severe -- disfigurement, the significant loss of use of a body part, permanent or long-term disability or bone fracture. Finally, some states have "serious injury thresholds," and describe in detail the exact conditions that constitute a serious injury.

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