No-fault Automobile Insurance
Ever since the invention of automobiles, there have been automobile accidents. And with those accidents have come legal disputes about who was most at fault in causing them—and who should be forced to pay damages. The U.S. legal and political systems have struggled to determine the best way to handle the large number of legal disputes related to automobile accidents. Although the states vary in their procedures, two basic approaches have evolved. The first and older approach is the traditional liability litigation system, which attempts to determine, usually through jury trials, who is more liable, or more at fault, and must pay damages. The second and more recent approach is no-fault insurance, which simply allows each party to be compensated, regardless of fault, by its own insurance company for accident damages. Both approaches have their advantages and disadvantages, and the debate about which is better continues.
The traditional liability litigation system developed out of the English COMMON LAW. Under this system, anyone who suffers an injury from a wrong or negligent act of another is free to sue the other party for damages. For example, someone who is paralyzed in an automobile accident and becomes confined to a wheelchair may sue the other driver or drivers involved in the accident. Whether or not the injured person receives payment for those damages is largely dependent on a determination of who was more at fault in causing the accident. If, in a court of law, it is determined that the other driver is at fault, then the injured person may collect a large sum from the other driver or, if the other driver has liability insurance, from the other driver's insurance company; if it is determined that the other driver is not at fault, the injured person may not receive any payments beyond those from her or his own insurance company.
This system of resolving disputes is also called the TORT litigation process. In relation to automobile accidents, a tort is a civil (as opposed to criminal) wrong that causes an accident—for example, failure to practice caution while driving, thus causing a collision with another car and injuries to its passengers.
As time passed and auto accidents became more frequent, some people began to point out problems in the liability litigation system for resolving accident disputes. They noted that, owing to the complicated nature of many automobile accidents, it often took a great deal of time to determine who was at fault. As a result, many accident victims had to wait a considerable period before they could receive adequate compensation for their injuries. Other victims who may have been unable to work because of injuries, frequently settled for smaller amounts or even waived their right to a trial, in order to receive faster payment from insurance companies. Other critics of the liability litigation process claimed that the awards granted in auto accident cases varied greatly. Some people were overpaid, and others underpaid, for their damages. A better system, critics maintained, would make all drivers share in the cost of accidents. These critics began to press for a no-fault insurance system as an alternative to liability litigation.
As early as 1946, the Province of Saskatchewan, Canada, enacted no-fault auto insurance. Under a no-fault system, those involved in an accident are compensated for their physical injuries up to a certain limit; even the driver who causes the accident is paid for damages. In its purest form, no-fault automobile insurance does not allow those involved in an accident to sue each other, nor can any party recover damages for pain and suffering. However, no-fault plans are often combined with traditional liability systems to allow accident victims to sue when damages exceed a certain threshold. For example, in New York, it is possible to sue to recover for economic damages greater than $50,000 or for pain and suffering because of death or serious injury. No-fault insurance plans are always compulsory, and every driver who wishes to register a vehicle must obtain at least the minimum standard of no-fault insurance.
In the United States, no-fault automobile insurance was first enacted by Massachusetts in 1971 (Mass. Gen. Laws Ann. ch. 90 § 34A et seq. [West 1995]) in response to public dissatisfaction with long, drawn-out, and expensive court cases for compensation of losses suffered in traffic accidents. In the same year, Congress considered no-fault as a comprehensive national automobile insurance plan, but the proposal never became law. That unsuccessful bill evolved into the National Standards for No-Fault Insurance Plans Act, which would have set federal standards for state no-fault insurance laws. It too did not pass. Opponents of the bill claimed that the states should be allowed to experiment with this new approach before a national plan was adopted. By the mid-1990s, roughly half the states had enacted no-fault insurance plans.
In arguing for no-fault insurance, advocates pointed out a number of advantages, including faster benefits payment and more equal damages awards to accident victims. They claimed that no-fault insurance would reduce the number of traffic-related court cases, thereby freeing up the courts to consider other cases. No-fault, they argued, would also reduce the cost of car insurance premiums as the legal costs associated with settling auto-related cases decreased. Since the establishment of no-fault insurance in many states, no-fault advocates have bolstered their cause even more by pointing to statistics showing that no-fault plans increase the percentage of insurance benefits payments that go to victims rather than to lawyers and court costs. According to those statistics, in states without no-fault insurance, only forty-eight cents of each dollar spent for insurance premiums goes to those injured in accidents, whereas thirty-two cents goes to court costs and lawyers' fees. However, under the no-fault system in force in Michigan, for example, seventy-three cents of each insurance premium dollar goes to accident victims and four cents goes to court costs and lawyers' fees (Carper 1992).
On the other side of the issue, critics make a number of different points against no-fault insurance. Many, including trial lawyers and some consumer advocates, object to no-fault insurance's elimination of or substantial restrictions on the right to sue for damages. Many states, for example, allow injured parties to sue for "pain and suffering" only if they have sustained specific injuries such as dismemberment, disfigurement, or fracture. Often, "soft-tissue" injuries like whiplash are not allowed as adequate grounds for a lawsuit. Critics also maintain that no-fault insurance takes away the incentive to drive safely. Under the system of no-fault insurance, careless, negligent drivers are entitled to the same compensation in an accident as are careful, responsible drivers. In addition, critics of no-fault insurance cite evidence that the system has not reduced insurance premiums. Under no-fault plans, they argue, the number of persons receiving benefits payments has increased, thus offsetting the reduction in legal costs.
It remains to be seen whether no-fault insurance will continue to spread to other states. Nevada and Pennsylvania have tried no-fault insurance plans and repealed them, with Nevada returning to a financial responsibility law and mandatory liability and property damage insurance. California has considered no-fault insurance for many years but has never adopted it. Some states are looking at compromise plans that preserve elements of both the traditional liability litigation system and the no-fault system. These plans, such as the one in New York, compensate all accident victims, regardless of fault, for basic economic losses—including medical and hospital expenses and lost wages or services—and in the process eliminate small cases where litigation is least cost-effective. At the same time, such plans preserve the right to sue for damages in cases of death or serious injury or when damages exceed a certain amount.
In the end, the question of how to handle auto accident disputes will be decided on the basis of which system—liability litigation, no-fault insurance, or a compromise between the two—is deemed better at limiting costs and at the same time preserving the value of fairness that underlies the U.S. system of justice.
Lascher, Edward L., Jr., and Michael R. Powers, eds. 2001. The Economics and Politics of Choice No-Fault Insurance. Boston: Kluwer Academic Publishers.
Liao, Y-Ping, and Michelle J. White. 2002."No-Fault for Motor Vehicles: an Economic Analysis." American Law and Economics Review 4 (fall): 258–94.
Mandell, Mark S. 1999. "What's Wrong with Auto No-Fault: S. 625, the Auto-Choice Reform Act." Trial Lawyers Quarterly 29 (winter): 31–42.
Schwartz, Gary T. 2000. "Auto No-Fault and First-Party Insurance: Advantages and Problems." Southern California Law Review 73 (March): 611–75.
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