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No-Fault Auto Insurance: How Does It Compare with Traditional Insurance?

Updated: May 28, 2018

The idea behind no-fault auto insurance is that the insurance company pays out money in relation to expenses and damage incurred by the insured party.

These payouts by insurance companies are made regardless of who was at fault for the accident.

With no fault auto insurance, individuals do not need to worry about who caused an accident as long as they have a thorough insurance policy.

However, in the United States, most no-fault auto insurance laws also place a limit on what one party can seek in damages from the other party.

This means that the law puts limits on potential lawsuits related to car accidents.

What Does No Fault Mean?

In a strict sense, no-fault auto insurance refers to the fact that there is no relationship between who caused an accident and the insurance company that must pay out damages.

In no-fault auto insurance contracts, the policyholder, and other passengers in the car, receives a benefit that is known as personal injury protection, or PIP.

If an individual lives in a no-fault state and they get an insurance policy with certain levels of coverage, the company must pay out to the individual in the event of an accident – regardless of who caused the collision.

This ensures that the compensation received after an auto accident is directly related to the level of auto insurance a person holds, not whether or not they were responsible for the accident. It is also a form of protection against drivers who are on the road despite not having insurance.

In no-fault auto insurance contracts, the policyholder, and other passengers in the car, receives a benefit that is known as personal injury protection, or PIP. It is this part of the contract that provides compensation for medical expenses.

However, the policyholder in states with no fault auto insurance laws is also limited in how he or she can sue the other party of the accident in a court of law.

States with No Fault Auto Insurance Laws

As of 2016, there are 12 states in the United States of America that have no-fault auto insurance laws. These states, including Florida, Michigan, New York, New Jersey, Pennsylvania and Massachusetts, ensure that a policyholder always receives compensation from their insurance company following an accident.

While the idea behind no-fault auto insurance is simple, the implementation often gets complicated, especially in certain states.

However, it is important to note that not all of these states make it mandatory to get no-fault auto insurance. In three of the no fault states in US, which are Kentucky, Pennsylvania and New Jersey, individuals have a choice between traditional auto insurance policies and no fault auto insurance.

While the idea behind no-fault auto insurance is simple, the implementation often gets complicated, especially in certain states.

It is advisable to talk at length with your auto insurance agent before making a decision regarding no-fault auto insurance, because they will know the policies and laws relevant to that state.

The limitations on suing another party in the accident are also different in each state. Some states have significant limitations, while the rules are more relaxed in others.

Types of No-Fault Auto Insurance

No-fault auto insurance covers a number of elements in auto insurance. Bodily injury is covered as part of the liability portion of a no fault auto insurance contract. This means that the insurance company pays for medical expenses related to injuries that occur during the accident.

Along with medical expenses, these contracts also cover lost earnings if the policyholder is unable to return to work because of the accident.

With no fault coverage, medical claims are paid very quickly, because the insurance company is not busy trying to figure out who caused the accident. These claims also extend to passengers who were in the car at the time of the accident.

Along with medical expenses, these contracts also cover lost earnings if the policyholder is unable to return to work because of the accident.

This is very helpful, because a number of auto accident-related injuries do cause individuals to need a few days of rest, especially if they perform labor intensive duties at their job.

Unfortunately, no-fault auto insurance does not pay for damage to a person’s vehicle when they get into an accident. For this coverage, individuals who live in no-fault states must purchase collision coverage.

Differences with Fault and No-Fault Auto Insurance

The major difference with fault and no-fault auto insurance lies in the “responsible party” for an auto accident. With traditional insurance, there are liability and collision coverages that provide payouts for damage to vehicles and medical expenses.

For insurance companies, paying out in no-fault cases is often a speedier process, because there is no need to determine who was at fault for the accident.

However, liability coverage is triggered for the other party when the policyholder causes the accident, while collision coverage protects you from accidents that were not your fault.

Traditional auto insurance does make it complicated for individuals to decide on how much insurance they need. While liability insurance is legally mandatory in most states, collision coverage is entirely optional. This means that many drivers do not have protection for car damage or medical expenses if they cause the accident.

With traditional insurance, the policyholder only needs to activate their insurance policy if they cause an accident. For accidents the other party caused, it is that party’s insurance company that takes care of the compensation.

For insurance companies, paying out in no-fault cases is often a speedier process, because there is no need to determine who was at fault for the accident.

Advantages and Disadvantages of No-Fault Auto Insurance

In theory, there are almost no disadvantages to no-fault auto insurance. After all, the policy eliminates accident fault from the insurance equation. If you get into an accident, medical expenses are paid by your insurance company in a rapid manner.

The lack of protection for an individual’s vehicle is also a major gap in no fault auto insurance policies.

However, the implementation of this policy is never that simple.

For one, individuals who get no-fault auto insurance will find that their insurance premiums can rise if they get into a number of auto accidents – regardless of who was at fault for those accidents. This means that your premiums could go up through no fault of your own.

However, the starting premiums for no-fault auto insurance policies are often lower than comparable traditional policies, because insurance companies do not have to worry about expensive and lengthy lawsuits related to car accidents.

The lack of protection for an individual’s vehicle is also a major gap in no fault auto insurance policies. This means that the individual needs to get another policy to cover their vehicle – collision insurance. Getting no-fault auto insurance and collision coverage is often more expensive than coverage in a fault state.