What is No-Fault Insurance?

I live in Colorado, a no-fault insurance state. What exactly does that mean? I’m never at fault in an accident? Well, no. What it means is that my insurer will pay my expenses, but if I’m at fault there is a price to pay. How so? Colorado follows a modified no-fault insurance system as do the other 12 no-fault states: Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah. Let me elaborate.

There are excellent reasons for no-fault insurance: lower insurance premiums, less auto accident court cases, restrictions on pain and suffering, and providing limits for loss payments. However, this guarantee of payment also prohibits your rights to sue other drivers. By having lower premiums, auto insurance becomes available to more people especially those of lesser means. Automatic claim payment should expedite the process after the accident. No-fault insurance punishes uninsured motorists. Fewer lawsuits free the justice system for other matters.

On the other hand, there are drawbacks as well. There isn’t any compensation for your pain and suffering. The other economic damages are limited by the policy. Bad drivers are protected since there isn’t any incentive to drive well. It’s nobody’s fault. Yea, right. It has been found that auto insurance premiums are an average of 25% higher in no-fault states than in traditional liability states. The litigation costs remain the same because the insured sue the insurance companies for non-payment instead of the other driver.

So, I said that Colorado was a modified no-fault insurance state. Pure or modified, what is the difference? With a pure no-fault system, your insurance company pays all economic damages to the policy limit and you are completely prohibited from suing for non-economic damages. Economic damages are medical bills, lost wages, etc. Non-economic damages are pain and suffering, loss of companionship, etc. The modified system is the same as pure, except you may sue for non-economic damages, if it exceeds the verbal and/or the monetary threshold. The verbal threshold refers to serious injury/death law limits. The monetary threshold is the dollar amount required to be reached on medical bills, etc. These thresholds vary by state.

One last thing on no-fault for our New Jersey and Pennsylvania web-surfers. Your system is choice no-fault. This means that you have a choice: pure no-fault or modified no-fault (also referred to as limited tort and tort respectively), where you retain some litigation rights. Once again, the pure system is less expensive and better for bad drivers, while the modified version is geared towards good drivers and is likewise more expensive.

So, now those of you residing in those 13 states should understand what your auto insurance system really is. Like everything in life, it has its good points and its bad ones. At least now you know the difference.

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