No Fault Insurance: The True Costs

June 3, 2009

Twenty four states including the District of Columbia and Puerto Rico have some form of no fault insurance for their auto insurance programs. With this type of policy, your insurance company pays if you are injured in a traffic accident, not the insurance company of the other driver. It also restricts your ability to sue the other party in the accident if that party was the one at fault.

This form of insurance includes restrictions under which an injured party can initiate a law suit. A policy could have one of two forms of restrictions or thresholds-a quantitative monetary threshold or a qualitative verbal threshold.

The quantitative monetary threshold sets a specific dollar amount that must be spent before a law suit is allowed. The qualitative verbal threshold actually lists what injuries are serious enough to allow a law suit. This could include death, permanent disability or disfigurement.

The disadvantage of the quantitative monetary threshold is that an injured insurer could exaggerate medical costs. Moreover, the threshold could become ineffective due to the inflation of medical costs over time. The disadvantage of the qualitative verbal threshold is that since it is verbal, it is up to the court to actually define the threshold in dollars which can cause over compensation.

The advantage of the monetary threshold is that it obviously limits law suits. The advantage of the verbal threshold is that it limits law suits and also removes the incentive for an injured party to inflate their medical costs.

Of course, as with any issue, there are proponents and opponents to no fault insurance. Opponents say they oppose it because:

• It doesn't satisfactory punish bad drivers.
• Good drivers have to shoulder much of the responsibility of bad drivers.
• There are more law suits against a driver's own insurance company for failure to pay benefits.
• A lot of time is spent in litigations defining verbal quantitative thresholds and determining whether thresholds have been met.

Proponents argue that:

• The injured party is paid quicker.
• Drivers save on court and lawyer's fees.
• The cost of insurance is more affordable.
• Uninsured drivers are not subsidized.

States that have no fault with a qualitative verbal threshold include: