No Fault Car Insurance Basics

No Fault Insurance is a concept originally adopted in some form by 24 states between 1970 and 1975. The move was motivated by lots of public outcry in the 1960s over the costly and time-consuming process of figuring out who was to blame when an accident happened under traditional personal responsibility auto liability insurance. In theory, no fault car insurance promised to deliver many benefits:

  1. It would allow accident victims to recover financial losses such as medical bills, hospitalization and lost income from their own insurance companies, which would lead to quick claim payments
  2. It would lower auto insurance rates because insurance companies could stop making overpayments on small claims just to avoid lawsuits
  3. Lower car insurance rates would also result because insured drivers would no longer have to supplement for uninsured drivers

Strictly defined, no fault means insurance companies pay first-party benefits (also called personal injury protection or PIP) and there are restrictions on the right to sue. But, because no fault insurance laws were written state-by-state, there’s no uniformity. The major differences, state to state, involve the monetary limit set on medical bills, lost income and other out-of-pocket expenses.

Note that drivers in no fault auto insurance states can sue for injuries that qualify under certain conditions called tort liability. Tort liability falls under two categories: verbal thresholds (death, disfigurement and similar conditions where actual dollar value can’t be easily determined) and monetary thresholds like medical bills, lost wages and similar quantifiable losses.

Has no fault car insurance lived up to its promises? Not according to a national study conducted by the non-profit Foundation for Taxpayer and Consumer Rights (FTCR) found that far from resulting in cheap car insurance, no fault car insurance policies were consistently more expensive than traditional personal responsibility car insurance. In fact, since 1986, states with some type of No Fault have been consistently ranked in the top 10 highest priced car insurance premiums. The same study found that car insurance premiums in No Fault states are 19% higher than in states that have personal responsibility car insurance.

Furthermore, the verbal threshold intended to eliminate the incentive to inflate pain and suffering claims, but broad judicial interpretation has eroded the verbal threshold in some states. Other critics say PIP coverage is an easy target for fraud and abuse when doctors and clinics bill for expensive, unnecessary procedures and equipment. Currently, there are only 12 states and Puerto Rico who still have no fault laws on the books.


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