By Marianne Bonner. Business Insurance Expert
Marianne Bonner is a freelance writer and insurance consultant for the insurance industry. She is an industry veteran, having worked in the insurance business for three decades. You can reach her via email at firstname.lastname@example.org.
Twelve states in the U.S. currently have some type of no-fault automobile liability law. What is a no-fault law and how does it work?
No-fault auto insurance laws originated in the 1970s. They were designed to reduce litigation and administrative costs associated with auto liability claims. The idea was to eliminate or reduce tort claims. Victims of auto accidents would be indemnified for their injuries under their own insurance policies regardless of fault.
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None of the no-fault laws currently in effect entirely replaces the tort system. Under the tort system, an auto accident victim may recover damages for bodily injury or property damage by suing the person responsible for the accident.
There are three basic types of no-fault auto laws in the U.S.
These laws prohibit an injured party from filing a lawsuit unless the injury meets a specified threshold. The threshold may be a dollar amount or a verbal description. An example of a dollar amount threshold is $2,000.
If the threshold is $2,000, a person injured in an auto accident is barred from filing a lawsuit unless medical expenses from his or her injuries reach $2,000. In states with a verbal threshold, an injured person may file a lawsuit only if his or her injury is considered "serious". An injury may be deemed serious if it results in, say, death, a permanent disability or dismemberment.
Under a threshold-type law, an auto accident victim who has sustained an injury that does not meet the threshold must look to his or her own auto policy for compensation.
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The policy pays medical expenses and economic losses (such as loss of earnings) under a coverage called Personal Injury Protection or PIP. When an injury does not meet the threshold, the injured party may not file a lawsuit. Thus, he or she cannot recover for non-economic damages (pain and suffering).
An add-on-type law does not affect the right to file tort claims. Under an add-on law, PIP coverage is added onto the tort law coverage. This add-on coverage is mandatory in some states and voluntary in others.
A third type of no-fault law is the choice type. This type of law allows policyholders to choose between full tort coverage and limited tort coverage. The full tort coverage is more expensive than the limited tort variety. When the policyholder purchases a policy, he or she must choose between full tort and limited tort coverage. Under full tort
coverage, an injured motorist can sue for economic and non-economic damages. Under limited tort coverage, an injured party may sue only for economic damages that exceed the limits of his or her PIP coverage. Kentucky, Pennsylvania and New Jersey have choice no-fault laws.
No-Fault Coverage Under a Commercial Auto Policy
No-fault coverage is provided under a commercial auto policy by adding the applicable state PIP endorsement. For no-fault to be covered, a covered auto designation symbol must be listed in the declarations next to "No-fault Coverage." Under the standard commercial auto policy, the number "5" is used to provide automatic coverage for autos you own that are required to have no-fault benefits in the state where they are garaged. If no-fault coverage is optional in your state, then another symbol should be used. One option is "2," which covers all autos you own.
Personal Injury Protection Coverage
PIP coverage is similar to Auto Medical Payments but broader. Like Medical Payments, PIP covers medical, surgical, diagnostic, x-ray, hospital and other expenses that are necessary for treatment of an injury sustained in an auto accident. Like Auto Medical Payments, PIP also covers funeral expenses if an insured dies. Here are some other expenses that may be covered under PIP but are not covered under Auto Medical Expense Coverage.
- Rehabilitation. Covers the cost of treatment (such as physical therapy) for rehabilitation. May include occupational rehabilitation.
- Replacement Services. Covers expenses incurred to obtain services from an outside source (other than a family member). These are unpaid services, such as housework or childcare, which the insured performed himself or herself before the accident.
- Loss of Income and Replacement Services for Survivors PIP generally covers loss of income sustained by survivors as a result of the insured's death from an auto accident. Some states also cover the cost of hiring someone to perform services formerly provided by the deceased.
- Loss of Income Covers income the insured has lost as a result of the accident. Income loss is usually replaced at less than 100%.
PIP typically applies to you (the named insured) and any resident family member who is injured while occupying any auto or while a pedestrian. It also covers anyone else who is occupying a covered auto.
Finally, a person who is eligible for benefits under PIP may have access to other types of coverage such as workers compensation or health insurance. These other coverages may overlap with PIP. Each state has its own rules as to which coverage applies first. Some states allow insurance buyers to decide whether PIP or health insurance will apply as primary coverage. PIP coverage should be cheaper when it applies as excess coverage over health insurance.