What is no-fault insurance?
You’re minding your own business in your car at a red light on your way to work. The light turns green, and you slowly accelerate into the intersection.
Bam! A pickup truck barrels into your passenger door. Your car ends up in the ditch on the side of the road — seriously damaged, maybe totaled. Fortunately, you don’t think you’re badly hurt, but you accept an ambulance ride to the emergency room just in case.
Fast-forward a few weeks later. You’re well on your way to getting a hefty insurance payout for your car, but there’s a problem. That hospital visit produced an eye-watering bill your health insurance won’t fully cover. Can you sue the pickup driver, who was clearly at fault in your accident? Probably not if your state has a no-fault auto insurance law.
What Is No-Fault Auto Insurance?
No-fault auto insurance is sometimes referred to as personal injury protection, or PIP. However, this isn’t technically true.
PIP is a type of auto insurance coverage that drivers in no-fault states must carry. No-fault is the legal framework that mandates PIP and specifies the types of expenses covered by PIP. No-fault laws also restrict drivers’ right to sue other drivers involved in an accident for medical bills, funeral costs, and lost wages.
No-fault auto insurance is mandatory in more than a dozen states, known as “true” no-fault states. If you live in one, you must carry PIP and can only sue other drivers if your situation meets certain conditions.
PIP coverage is optional in a smaller number of states — “optional” or “add-on” at-fault states, depending on how the law works there. You can add it to your car insurance policy if you wish, but it’s not an obligation.
How Does No-Fault Auto Insurance Work?
If you have no-fault insurance, you must file an auto insurance claim with your insurance company and hope they’ll reimburse you for that ill-timed medical bill. Only if you have a severe injury — one that changes your life — will you have legal recourse.
Note that if you’re involved in a car accident while behind the wheel, there are at least two parties to the incident: you and your insurance company. You and any passengers in your vehicle are the first party. Your insurance company is the second party.
If other drivers or bystanders are involved in the accident, they’re third parties. Examples of third parties include but aren’t limited to:
- Drivers of other vehicles involved in the accident
- Passengers in other vehicles involved in the accident
- Bystanders involved in the accident
Injury Claims Under No-Fault Laws
If you live in a true no-fault state and suffer minor injuries in a car accident with third parties, your insurance company covers only your injury claim. The other parties’ insurance companies cover their own injury claims.
No-fault auto insurance works that way regardless of who’s at fault for the accident. For example, even if a police investigation finds that you’re solely responsible for a rear-end accident that injures you and the driver in front of you, your insurance company is responsible only for your claim. The other driver’s insurance company covers their claim.
Additionally, drivers in true no-fault states often can’t sue other drivers for compensation related to accidents they caused. No-fault laws allow for accident-related lawsuits only if the accident in question meets specific conditions, also known as thresholds:
- Verbal Thresholds. Verbal thresholds relate to the nature of the injury. Generally, you can’t clear the verbal threshold unless an accident results in permanent disability, disfigurement, or death.
- Monetary Thresholds. Monetary thresholds relate to the cost of the injury, such as hospital bills, recovery care, and lost wages. Monetary limits vary by state but typically must be significant — in the six-figure range.
Some states have verbal thresholds, while others have monetary thresholds.
Injury Claims Under At-Fault Laws (Tort Liability States)
In contrast, if you live in a state without no-fault laws — also known as a tort liability state — then determining who’s at fault for an auto accident is critical.
If you’re solely responsible, your insurance company could cover all parties’ injury claims. If another driver is at fault, their insurance company could cover their claim and yours. The coverage that funds this compensation is known as bodily injury coverage — also known as bodily injury liability — rather than personal injury protection coverage.
Additionally, drivers in tort liability states face fewer restrictions on lawsuits arising out of car accidents. Injured parties can generally sue another driver who’s at fault for an accident even if the associated costs are relatively low.
Optional No-Fault & Add-On No-Fault States
In some states, the laws around auto insurance occupy a middle ground between true no-fault and true tort liability. Laws in these states fall into one of two categories.
In an optional no-fault state, you can choose between a no-fault policy and a traditional tort liability policy. If you choose no-fault, you can’t sue another party after an accident unless your injuries clear your state’s verbal or monetary threshold. If you choose traditional tort liability, you can sue other parties even if your injuries are minor or not particularly costly.
In an add-on state, you can add no-fault coverage to your policy if you wish. That entitles you to first-party benefits regardless of who’s at fault for the accident. However, even if you add no-fault coverage, you can still file suit against other parties, even for minor injuries. You don’t need to worry about clearing verbal or monetary thresholds.
Property Damage Claims & No-Fault Auto Insurance
Property owners harmed as a result of a car accident, such as homeowners whose houses your vehicle damages, are technically third parties as well.
But if your driving activity results in damage to personal property like a house, mailbox, or parked car, and the owners themselves aren’t injured, they’re not considered parties to the accident within the no-fault framework. They’re not eligible for PIP compensation.
However, they may still be eligible for compensation through your auto insurance policy’s property damage liability coverage. This type of coverage is required in most states and helps reduce your out-of-pocket liability for property damage you cause while behind the wheel.
What Does No-Fault Car Insurance Cover?
In states with no-fault car insurance laws, your insurance policy compensates you and any passengers in your vehicle for medical injuries sustained during an accident. If the accident involves another driver, their insurance policy compensates them and any passengers in their vehicle for medical injuries.
This coverage applies regardless of who the police or insurance company determines to be at fault for the accident. It doesn’t matter whether you’re entirely at fault, the other driver is entirely at fault, or you’re both to blame. Your respective insurance policies cover your respective injuries.
In no-fault states, first-party PIP compensation generally extends beyond medical bills. However, each no-fault state has its own rules about the types of expenses covered and the maximum coverage amount for each expense type. Most true no-fault states provide some amount of coverage for:
- Medical expenses like hospital bills or surgery bills
- Physical therapy and other recovery expenses
- In-home care expenses and other expenses for services the injured party can’t perform themselves
- Lost income due to injury or disability
- Funeral and burial expenses
Notably, personal injury protection coverage usually doesn’t come with a deductible. You probably won’t have to pay out of pocket for your own medical costs if your PIP insurance covers them.
Do Insurance Laws Require No-Fault Insurance?
Are you required to have no-fault insurance? That depends on where you live.
The following states required no-fault coverage as of late 2021. State auto insurance laws change from time to time, so check with your insurance company or state insurance commissioner for information about current regulations in your area.
- New Jersey
- New York
- North Dakota
- Puerto Rico
Optional No-Fault States
Several states had optional no-fault laws as of late 2021. If you own a vehicle in any of these states, you can choose whether to carry personal injury protection coverage or decline it without penalty:
- District of Columbia
- New Hampshire
- South Dakota
Even if you don’t live in a no-fault insurance state at the moment, it’s worth understanding how it works and how it’s different from other types of auto insurance. Over the years, various states have enacted and repealed no-fault insurance laws, keeping drivers — and car insurance companies — on their toes.
No matter what type of auto insurance your state requires, it’s a sure bet the law requires you to carry a minimum amount of coverage. So take a few moments to familiarize yourself with the rules in your neck of the woods.