410.6-17

NO-FAULT AUTOMOBILE INSURANCE FUNDAMENTALS

(September, 2007)

Automobile liability insurance operates within the common law structure called tort liability. It offers complete protection, assuming adequate limits of insurance are carried, for an insured motorist's legal liability under the law. In order to collect damages, an auto accident victim must proceed against another motorist or another motorist's insurance company and prove the other driver to be at fault. A determination of who is at fault must be made before anyone can collect from a liability insurer.

Criticism Of The Fault System

A former Chairman of the Insurance Company of North America once summarized the situation as follows:

"Automobile Insurance did not go wrong. It still offers complete protection against a motorist's legal liability under the law. It operates today under the same classic principles of insurance that work, and work well, for your homeowners' policy, your disability insurance and many other standard and well-accepted forms of liability coverage.

What happened was that the law and auto insurance stood still, while the auto itself and its place in American life changed radically. And so has the concept of social justice, with its increased emphasis on financial security for all.

The problem, then, is that the classic principles of the law as applied to the operation of automobiles in general, and of liability insurance in particular, no longer offer a satisfactory solution to a growing social problem.

What is needed is an entirely new approach to the problem presented by the victims of auto accidents, an approach that would harmonize with the thinking and the needs of our modern automobile-oriented society."

The principal criticism of automobile insurance coverage centers on its cost and availability, slowness and delays in payment, alleged "unfairness" of settlements, and people's irritations from dealing with adjusters, lawyers and the courts.

The public is keenly aware that auto insurance premiums have been rising and that they constitute a major item in most families' budgets. Though most people understand that inflationary factors push insurance costs up, and that cost factors such as medical care, legal services and auto repair are outside the control of insurers, the public nevertheless tends to relate rising costs for coverage to shortcomings in the auto insurance system itself.

Closely related to price issues are complaints over the availability of auto insurance. When state insurance departments do not approve requested rate increases, availability is affected. Companies become reluctant to issue policies to persons they have reason to classify as less than good risks.

General Conclusions

Numerous opinions and studies have led to the following conclusions about the tort liability automobile insurance reparations system:

·         It is not satisfactory to the public because of the inequities in the legal system under which it operates.

·         It is not satisfactory to the insurance companies because it has not been a profitable enterprise overall. Rising jury awards and the cost of adjusting third party claims have since been a matter of great concern.

·         It is not satisfactory to both state and federal governments because it constitutes a serious political and administrative problem that can be regulated to no one's satisfaction.

Objectives Of A Reform To The Tort System

Through thorough examination of the alternatives, the Department of Transportation has identified the ideal compensation system as one that will:

·         guarantee payment of basic economic losses to all accident victims without regard to fault;

·         drastically limit and carefully define intangible damages;

·         eliminate as many lawsuits and as much of the adversary nature of the system as possible;

·         offer maximum opportunity for rehabilitation;

·         continue to be serviced by the private insurance industry; and

·         continue to be regulated by the individual states.

No-Fault Insurance As A Solution

The variety of proposals made over the years to address the problems cited above essentially call for first-party coverages for medical and hospital expenses and for income loss. Most plans would fix a total limit of expense per accident to which the insurance would apply; others would place no ceiling on the total amount of recovery payable for these losses.

The policy would reimburse insured persons for economic loss and for hospital, medical and rehabilitation expense arising out of automobile accidents. Economic loss would include present and future wage loss, cost of services such as housekeeping to replace those of the insured, other reasonable out-of-pocket expenses, and damage to property other than automobiles. Payments would be made periodically.

Payment for "pain and suffering" would be excluded. But all plans would make provision for the compensation of permanent impairments and it is at this point that there is considerable study, discussion and difference in opinion. Either extra payment could be provided under the insurance for serious injury or tort recovery would still be available.

Motorists would assume the risk of damage to their own cars under most proposals. Physical damage insurance would be offered much like collision coverage and comprehensive coverage presently available.

Types Of No-Fault Laws

No-fault automobile insurance laws can be classified into three categories. These are:

1. modified no-fault laws

2. add-on plans

3. pure no-fault laws

Under a modified no-fault automobile insurance law, the right to sue is restricted but not completely eliminated. Injured persons are permitted to sue if the claim exceeds the monetary or verbal threshold. The monetary threshold is usually expressed as dollars of medical cost (such as damages recoverable if medical expenses exceed $4,000). Verbal thresholds may be expressed in definitions describing seriousness of injury (such as damages recoverable only if injury results in significant disfigurement, permanent loss of bodily function or death). Verbal thresholds are also expressed in terms of length of disability caused by injury (such as damages recoverable if medically determined injury or impairment of a non-permanent nature prevents injured person from performing substantially all material acts which constitute normal activity for at least 90 of the 180 days immediately following the accident). But if the claim is below the threshold, the injured party would collect certain benefits from one's own insurer.

Add-on plans will pay certain described benefits to those who are injured in automobile accidents, without regard to fault; but the right to sue is not restricted. This explains the name add-on, as the law adds benefits but takes nothing away. Since the injured party's right to sue is not limited, add-on laws are not true no-fault laws.

With a pure no-fault law, the injured party cannot sue for damages, regardless of the severity of the injury. The tort liability system for bodily injury is abolished and replaced with a system where the injured party receives unlimited benefits from his/her own insurer for such items as medical expenses and loss of wages. No state has enacted a pure no-fault law to date.

Right To Sue Restricted But Not Eliminated

Briefly, no-fault laws alter the tort liability system to a significant degree as it relates to the automobile, but they do not restrict the right to sue when there are serious injuries. Pure no-fault statutes restrict or limit the right to recover for "pain or suffering." They substitute a system of compensating victims of automobile accidents on a first party basis. Insurance policies written under such laws reimburse injured persons for economic loss and for hospital, medical and rehabilitation expense arising out of automobile accidents. Economic loss includes present and future wage loss, cost of services such as housekeeping, and other reasonable out-of-pocket expenses.

Characteristics Of No-Fault Laws

Although each no-fault law has unique features with respect to particular law details, certain characteristics are common to all such laws. No-Fault benefits for automobile accidents are usually provided by adding an endorsement to an automobile insurance policy. This endorsement (usually called personal injury protection), through its terms and conditions, provides details on the benefits to be paid to an injured party. These no-fault benefits are limited to economic loss and make no provision for non-economic loss. Non-economic losses, like pain and suffering, may be recovered from the responsible party only when the claim exceeds either a specific monetary or verbal threshold (previously described). The following no-fault benefits are typically provided:

1. Medical Benefits: generally includes doctor, hospital and rehabilitation expenses. Most states have a maximum limitation on medical benefits receivable. Such limits are either specified or subject to the limitations on total benefits receivable.

2. Wage Loss Benefits: refers to benefits received for loss of income the victim would have received but for the injury. In most states the amount of wages recoverable is limited to a percentage of lost wages, wages which would have been earned in a fixed time period, and/or the total amount of first-party benefits receivable.

3. Replacement Services Benefits: benefits received to pay for services the injured person normally provides for the benefit for family members. Maximum limits are set by liquidated amounts over specified time periods and/or by limitations on total first-party benefits receivable.

4. Survivors' Benefits: generally, survivor benefits include compensation to dependents of the deceased victim for lost wages and replacement services. In most states maximum limits are set by liquidated amounts and/or limits on total benefits recoverable.

5. Funeral Benefits: refers to the amounts recoverable by the victim's survivors for burial expenses. In most states maximum limits are set by liquidated amounts and/or limits on total benefits recoverable.

Some states require that insurers offer higher, optional no-fault benefits to persons who want benefits greater than the prescribed minimums. In addition, some states require insurers to offer optional deductibles that can be used to reduce or eliminate certain no-fault benefits.

As previously discussed, under a true no-fault law the injured parties have only a limited right to file lawsuits. The states that have no-fault laws follow a modified law in which the injured party is not allowed to sue for damages unless the injury exceeds the threshold limit. However, laws in various jurisdictions allow the insurer to subrogate against the negligent motorist's insurance company to the extent of the benefits it has paid. Or the insurer is entitled to be reimbursed for benefits it has paid if there is a tort liability recovery from a third party.

Example: Paul is injured when, as he goes through an intersection, he is struck by Jill, who ran a red light with her SUV. Paul’s insurance company pays him $11,000 for his injuries. The no-fault law in their state allows suits to be filed for damages that exceed $8,000. Paul sues Jill and receives $6,000. Paul then pays his insurer the proceeds. The insurer ends up paying a net amount of $5,000. Note that Paul’s insurer could have assumed his rights to recover and sued Jill directly.

No-fault laws typically only apply to bodily injury and not to property damage; therefore, any restriction on the ability to sue does not apply to damages to property. One exception to this general characteristic is the law in the State of Michigan. In Michigan, automobile owners generally are prohibited from litigation with regard to property damage to their own vehicles. But even in Michigan, damage to property other than vehicles is subject to the tort liability system.

Current No-Fault Laws

No-fault statutes are presently effective in more than a dozen states. These states and jurisdictions have enacted statutes that restrict or limit the right to recover for "pain and suffering.” They substitute a system of compensating victims of automobile accidents on a first party basis, permitting an injured person to recover from his or her insurance company without reference to fault. Their essential characteristic is that they prohibit lawsuits unless an auto accident results in serious injuries, the qualifying nature of which is spelled out in the law. They alter the tort liability system to a significant degree as it relates to the automobile, but they do not restrict the right to sue when there are serious injuries.

Add-On Insurance: An Interim Solution

Some states have enacted laws whereby first party "add-on" personal injury coverages must be offered as a supplement to automobile liability insurance covering automobiles or motor vehicles registered or principally garaged in the state. They make provision for add-on coverage for medical expenses, lost income and other economic losses.

There is no "threshold" or limitation on the right to sue as a condition of payment of such benefits. The right to sue is preserved without reservation. The governing laws do not alter, in any degree, the existing tort liability concept. But in making provision for additional coverage for the benefit of injured persons, such laws may represent a positive step toward automobile insurance reform. Reasonable compensation is considered by many to be a practical method of tempering the burgeoning litigation process.

Current Add-On Insurance Laws

Statutes in some states presently require that insurance companies writing automobile liability insurance offer first party "add-on" benefits coverages to their insureds. The coverages are mandatory in some states. They may be rejected by the insured in others, but in any event, must be made available.

Arguments In Favor Of No-Fault

Proponents of no-fault automobile insurance argue that serious defects exist in a tort liability system that is based on fault and the necessity to prove negligence. These alleged defects are:

1. Difficulty in determination of fault

Automobile accidents often occur suddenly and unexpectedly. However, facts surrounding the cause of automobile accidents may become faded with time or may be suppressed or fabricated by one of the parties. Also, the legal defenses of contributory negligence and last clear chance are difficult to apply. No-fault automobile insurance permits recovery of certain benefits to an injured accident victim without a necessity to determine fault.

2. Inequities in claim payments

Critics argue that smaller claims are overpaid, while larger claims are underpaid. Evidence shows that economic considerations may cause insurers to pay out more for smaller claims in proportion to the actual economic loss, then expend funds for investigation and defense while insurers may vigorously resist larger claims in an attempt to reduce the amount of payment.

3. Limited scope of tort reparations system

Many injured persons do not collect under the present system. A no-fault system will work to compensate those injured in an automobile accident. No-fault compensates more victims more fully. The number of no-fault payouts per hundred insured cars is double that found in traditional (tort liability) jurisdictions. Successful no-fault claimants receive an average of $8,679 in total compensation, 79 percent more than their lawsuit counterparts, according to a study conducted by the U.S. Department of Transportation, "Compensating Auto Accident Victims.”

4. Large proportion of each premium dollar paid is used for legal costs

Almost one-fourth of each premium dollar is used to pay claim costs.

5. Delay in claims' payments

Large numbers of claims are not promptly paid because of claims' investigations, negotiations between the insurer and injured parties or their representatives, and the difficulties encountered in waiting for court dates. The more serious the injury, the greater the delay. Thus, the very parties who need to be compensated quickly are not. No-fault laws enable injured parties to receive immediate (or almost immediate) compensation for economic loss.

Payouts are made far more quickly under no-fault. One year after notifying his or her insurance company of an accident, the average no-fault claimant has received more than 95 percent of final compensation. Those forced to resort to the tort system have received just over a half one year after notification to the insurer. Swifter payment facilitates swifter physical recovery through more immediate access to better medical treatment.

6. No-fault is considerably the more efficient system

For example, auto accident victims in Michigan, where no-fault has been implemented in its purest form (high benefits coupled with severe restrictions on court access), receive an average of 14 more cents on their premium dollar. These savings mean that in no-fault states, a greater proportion of insurance money is going where it should—toward rehabilitating the injured, rather than being wasted in useless legal and administrative costs, according to a study conducted by the U.S. Department of Transportation, "Compensating Auto Accident Victims.”

7. No-fault systems relieve courts of suffocating caseloads

In the first four years of its no-fault statute, Massachusetts reported a drop of almost two-thirds in the number of automobile negligence suits brought to court (from 30,000 to 11,000 annually). Other no-fault states have witnessed similar dramatic reductions.

Arguments Against No-Fault

Proponents of the tort liability system present persuasive arguments against no-fault laws. These reasons are:

1. The defects of the current tort liability system are exaggerated

The concepts of negligence, as applied to automobile accidents, have a history of success. The present system is, in fact, working well, as most automobile claims are settled out of court.

2. The allegations that no-fault laws would result in insurance premium savings and greater efficiency are exaggerated.

It is argued by proponents of no-fault that because of alleged efficiencies, the cost of an auto reparations system would be reduced and this cost savings could be passed along to consumers in the form of savings on their premiums. However, the total dollars paid accident victims will not change and, in fact, may increase.

3. The safe driver may be penalized

Rating systems under a no-fault law could allocate the accident costs to the persons not responsible for the automobile accident, but who are the ones paying the benefits. The person actually responsible for the accident may escape any rating "penalty.”

4. The accident victim is not compensated for pain and suffering

A no-fault system provides for economic losses. Non-economic losses such as pain and suffering are not recoverable unless the injury exceeds the limit of the threshold.

5. Court delays are not all-embracing

While court delays may exist in selected metropolitan areas, the problem is not universal. While it is agreed this situation should be addressed, it must be handled as its own problem and not as justification for a no-fault system.

6. The present tort system only needs reform

Proponents of the tort system urge reform rather than replacement. Limiting contingency fees for attorneys and using alternative dispute resolutions are examples of revisions that will produce positive results within the current system.

Recognition Of Need For Reform

Renewed demand for change in the automobile insurance reparations system has accompanied rising insurance premiums and the withdrawal of various insurers from certain areas, or altogether. Industry spokesmen attribute the problems to an overly aggressive legal community, runaway judicial system, skyrocketing medical costs, and increasing claim frequency and severity. Clamor for a fundamental change in the judicial system, with respect to automobile insurance reparations, indicates increased interest in the "no-fault" concept.

No Fault Glossary

Below are several terms that may help your understanding of no-fault coverage. These terms come courtesy of another Rough Notes Product, Insurance Words and Their Meanings.

Contributory negligence - A common law defense in which the plaintiff must be entirely free from fault in order to recover from a negligent defendant. If the plaintiff has in any way been guilty of neglect, the plaintiff cannot recover from the defendant. This principle has been modified in some states by legislation and interpretation by the courts.

Keeton-O'Connell Plan - A "no-fault" plan for compensating automobile accident victims for their loss of wages and medical expenses, etc., without the usual legal proof of negligence. Devised by Professors Robert E. Keeton and Jeffrey O'Connell.

Modified no-fault - Refers to no-fault plans that include some level of consideration of a driver’s negligence in causing a loss. Such plans usually allow pursuit of compensation by lawsuit for certain types of losses or when a given level of severity is met.

No-fault automobile insurance - Coverage designed to compensate victims of automobile accidents via their own insurance carriers, regardless of fault and without the necessity of proving negligence on anyone's part. No-fault laws passed by different states vary greatly in their scope and application. Most provide that a victim's own insurance will allow a victim to sue in tort, once expenses or injuries have passed a stipulated threshold (monetary or otherwise).

Personal injury protection (PIP) - Also known as no-fault insurance, PIP provides insurance for medical costs, loss of earnings, additional living expenses, and funeral costs for occupants of the insured automobile and pedestrians other than those insured under other policies.

Pure no-fault - A reference to no-fault plan that completely ignores each party’s behavior or action that may have contributed to a loss.

Threshold level - This term applies to no-fault automobile liability provisions. No-fault was designed to reduce the time and litigation involved when two or more parties are involved in an auto accident by providing coverage with the insured's own insurer, regardless of who was actually at fault in the accident. Some states have a modified no-fault to allow an insured to take legal action against the negligent party who caused the accident when the accident exceeds a specified amount called the threshold level, or when serious bodily injury, disfigurement or death occurs. The threshold level is different by jurisdiction.

Verbal threshold - No-fault automobile laws are applicable in some states. In a portion of the states with no-fault laws, when the injuries of the victim meet or exceed specifically described criteria, the victim is compensated under the no-fault system but is also allowed the option to take legal action against the negligent tortfeasor under the tort system for injury and loss such as pain, suffering and, where allowed, punitive damages. The specifically described criteria, or verbal description of injuries are called the verbal threshold.

For an illustration of how technical no-fault provisions can get, please refer to PF&M Section 410_C098 "Insured's PIP Limited To $2,000 Since He Doesn't Utilize His HMO" in Court Cases.