The Fault System

An issue debated extensively over the past several decades is whether or not to maintain a fault-based compensation mechanism for automobile accidents. In response to the debate, over half the states have passed mandatory first-party benefits (also known as no-fault) laws. Subject to various limitations, such laws require that insurers compensate insureds for the insureds’ medical expenses, lost wages, replacement service costs, and funeral expenses incurred as a result of an automobile accident; these are collectively referred to as personal injury protection (PIP) and medical payments (Med Pay)Compensation paid to insureds for medical expenses, lost wages, replacement service costs, and funeral expenses incurred as a result of an automobile accident. Under no-faultInsurance laws under which benefits are provided by insurers without regard to who caused the accident. laws, benefits are provided by insurers without regard to who caused the accident.

Under the no-fault concept, first-party benefits such as PIP are provided without regard to fault as a way to avoid legal battles. If you were involved in a multicar accident where tort law applied, a lawsuit between the parties likely would result. The suit would be an attempt to place blame for the accident, thereby also placing financial responsibility for the losses incurred. Under the no-fault concept, each injured party would receive compensation from his or her own insurance company. There would be no need to expend resources in determining fault. Furthermore, the worry of being hit by someone who does not have automobile liability insurance would be eliminated. You already have a form of limited no-fault insurance in the coverages that compensate for damage to your car (discussed later in the chapter). The no-fault PIP or Med Pay benefits extend first-party coverage to expenses associated with bodily injury.

No-fault automobile laws are not uniform, yet they typically fall into three categories. Table 14.3 "State Auto Insurance Laws Governing Liability Coverage (Financial Responsibility Laws), 2009" lists the laws in each state. Pure no-faultTheoretical insurance laws that would pay only specific damages (economic losses, such as medical expenses and lost wages), but these would be unlimited. exists only theoretically and would abolish completely the opportunity to litigate over automobile accidents. Only specific damages (economic losses, such as medical expenses and lost wages) would be available under pure no-fault, but these would be unlimited. Michigan’s no-fault law is closer to pure no-fault than are the laws of other no-fault states.

Michigan’s plan, however, is an example of a modified no-fault law. Under a modified no-faultInsurance plan, in which rights to litigate are limited but not eliminated; generally, suit can be brought against an automobile driver only when serious injury has resulted from the accident or special damages exceed a given dollar amount. plan, rights to litigate are limited but not eliminated; generally, suit can be brought against an automobile driver only when serious injury has resulted from the accident or special damages exceed a given dollar amount, called a threshold. For nonserious injuries and those resulting in losses below the threshold, only no-fault benefits are available. Serious injuries, or those resulting in losses in excess of the dollar-value threshold, permit the injured party to take legal action, including claims for general damages (such as pain and suffering).

In states that adopted modified no-fault laws, as shown in Table 14.3 "State Auto Insurance Laws Governing Liability Coverage (Financial Responsibility Laws), 2009", there are two types of modification: (1) the verbal threshold, which describes the types of injuries for which the party at fault is considered liable, as in Florida, Michigan, New Jersey, New York, and Pennsylvania, and (2) the monetary threshold, which has a monetary limit under which no fault is assigned. When the claim is over this amount (the threshold in Massachusetts, for example, is $2,000), the at-fault system kicks in.

Some states do not limit rights to litigate but do require that insurers offer first-party coverage similar to what is available in no-fault states. An injured party can be compensated from his or her own insurer. The insurer in turn can sue the negligent driver. Rights to litigate are not affected. Auto plans that offer compensation to an injured motorist through the individual’s own insurer are called add-on plansAuto insurance plans that offer compensation to an injured motorist through the individual’s own insurer. or expanded first-party coverage.

Financial Responsibility Laws

Every state has some kind of financial responsibility lawLaw that acts to induce motorists to buy auto liability insurance so victims of their negligence will receive compensation. that acts to induce motorists to buy auto liability insurance so victims of their negligence will receive compensation. A typical law requires evidence of financial responsibility when a driver is involved in an accident or is convicted of a specified offense, such as driving while intoxicated. The simplest way to prove such responsibility is to have an auto liability insurance policy with specified limits that meet or exceed the minimum limits set by various state legislatures. The financial responsibility laws in the various states are shown in Table 14.4 "Automobile Financial Responsibility/Compulsory Limits by State, 2009". Insurers and consumer advocacy groups recommend a minimum of $100,000 of bodily injury protection per person and $300,000 per accident to avoid paying from your pocket in case of liability.Insurance Information Institute (III), The Insurance Fact Book, 2009, 66–67.

Several states also have unsatisfied judgment fundsState organizations that provide compensation in situations when an injured motorist obtains a judgment against the party at fault but cannot collect because the party has neither insurance nor resources. to provide compensation in situations when an injured motorist obtains a judgment against the party at fault but cannot collect because the party has neither insurance nor resources. The maximum amount the injured party may claim from the fund is usually the same as that established by the state’s financial responsibility law. When the fund pays the judgment, the party at fault becomes indebted to the fund and his or her driving privilege is suspended until the fund is reimbursed.

Financial responsibility laws increased the percentage of drivers with auto liability insurance, but many drivers remained uninsured. Therefore, about half the states require evidence of insurance prior to licensing the driver or the vehicle. Unfortunately, in many such states, only about 80 or 90 percent of the drivers maintain their insurance after licensing. Even a compulsory auto liability insurance law does not guarantee that you will not be injured by a financially irresponsible driver. A compulsory auto liability insurance lawLaw that requires automobile registrants to have specified liability insurance in effect at all times. requires automobile registrants to have specified liability insurance in effect at all times; however, numerous drivers find ways to operate motor vehicles without insurance.