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What is "no-fault" insurance?

In most states, the auto insurance industry operates under a traditional fault-based system. Under this system, insurance companies make payments based on each person's degree of fault in an accident. However, long and costly court battles are often required to determine who was at fault in many accidents. In an attempt to reduce this problem, 12 states (Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah) have adopted an alternative no-fault system of insurance.

Under this no-fault system, your insurer automatically pays for your damages, regardless of fault, up to a specified limit when you have an accident. In exchange for this guaranteed payment, you forgo some of your rights to sue the other driver involved in the accident. By the same token, you are protected from being sued if you are at fault in an accident. Elements of no-fault exist in all auto insurance coverage. For example, medical payments and property damage are typically paid regardless of fault.

Under a pure no-fault system, your insurer pays for any economic damages such as medical bills and lost wages up to the policy limit, and you are completely prohibited from suing a negligent driver for noneconomic damages (e.g., pain and suffering, loss of companionship). Currently, no states operate under a pure no-fault system, and the no-fault states listed above have adopted a modified no-fault system. This means that your insurer still pays for your economic damages up to the policy limit, but you may be allowed to sue for noneconomic damages if the amount of these damages exceeds a specified threshold.