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How Does No-Fault Insurance Work? A Brief Rundown

No-fault insurance eliminates the time wasted in determining who is at fault in an accident before receiving a payout check from your insurer.

Whenever there’s an accident, your insurance company covers the cost of your medical expenses, lost wages, and other vital losses you might have incurred from the accident. The big question now is, how does no-fault insurance work?

I’ll give you a quick rundown of what exactly a no-fault insurance is, details of how it works, what it covers and doesn’t cover, the pros and cons, and also answer common questions about this unique car insurance policy.

Bear in mind that one of the reasons why no-fault insurance came to be is to keep smaller claim disputes out of court and cut down on the cost of filing a suit to prove faults in a courtroom.

What is no-fault insurance?

No-fault insurance, also referred to as Personal Injury Protection (PIP), covers the cost of injuries you and your passenger sustained in an accident, including reimbursing you for lost wages during your period of incapacitation, housekeeping costs, and burial expenses.

All this is done up to the limit of your PIP coverage without taking into account who was at fault in the accident.

In a no-fault insurance state, you take out your PIP coverage whether you hit or get hit by a car. There’s no need for a claims adjuster to determine fault between the two parties.

The minimum coverage for PIP varies by state. Some states have a low minimum coverage of less than $4,500 and other states require as much as $50,000 for PIP coverage.

You just have to discuss with your insurance agent to find out the minimum coverage needed if you live in a no-fault state.

Related: How Does Car Insurance Work?

How does no-fault insurance work?

In no-fault insurance states, drivers are usually required to carry both PIP and liability coverage. Let me show you how it works.

Imagine you got involved in an accident where you got hit by another driver. Unlike other states where you proceed to file a third-party claim against the other driver’s liability coverage, you’ll need to turn to your own insurance policies in a no-fault state.

Heading to the hospital, you get diagnosed with a broken arm. You’ll give the hospital your car insurance policy and they’ll charge your insurer for your medical expenses.

You can also file a claim on your PIP coverage to reimburse you for lost wages since you’ll be at home recovering, and unable to work with a broken arm.

If you’re unable to do household chores, your insurer will cover the cost of housekeeping from your PIP policy, up to the limit of your coverage.

Some states give you the option of reducing the cost of PIP coverage by waiving work loss. This means that you can remove the option of receiving lost wages from your PIP coverage, making the premiums cheaper.

The driver who hit you would also use his PIP coverage and other insurance policies, as you will use yours.

None files a third-party claim against another because there is literally no fault to begin with.

The only time you’ll be allowed to seek compensation using the other driver’s insurance is when the nature of your accident meets two conditions.

The first condition is the monetary threshold where your medical costs exceed a prescribed amount by the state. If your state has a monetary threshold of $5,000 and your hospital bills pile up to the tune of $7,500, then you can sue the other driver for compensation.

A verbal threshold is the second condition, and it occurs in a case where the victim of an accident is dead, disfigured, loses a fetus, is dismembered, or experiences a fracture.

Only in these two cases can you file a lawsuit using the liability coverage of the other driver. You’ll just need to arm yourself with the hospital files and other relevant documentation from your insurer.

If you suffered only minor injuries but your car is severely damaged, you’ll need to take out your collision or comprehensive coverage to repair your vehicle, depending on the circumstances surrounding the accident.

Related: How Does Collision Insurance Work?

Who pays for car damage in a no-fault state?

All drivers in no-fault states pay for their own car damages with personal coverages as required by the law.

Irrespective of who is at fault, all parties in a car accident would file claims with their insurance companies to repair car damages.

How many no-fault insurance states are available?

At the moment, there are 12 no-fault insurance states where PIP coverage is mandatory. Take a look at them to see if your state is included:

  • New York
  • Massachusetts
  • Florida
  • Kentucky
  • Pennsylvania
  • North Dakota
  • Utah
  • Michigan
  • New Jersey
  • Kansas
  • Hawaii
  • Minnesota

There are other states that offer PIP coverage but are not considered no-fault states. Some of them include Oregon, Virginia, Washington, Arkansas, Texas, and Maryland, amongst others.

What losses do no-fault insurance cover?

No-fault insurance covers a wide range of unfavorable possibilities that result from a car accident. Here they are:

  • Medical expenses: All bills associated with your medical treatment including surgeries, drugs, and other prescriptions are covered by no-fault insurance policies.
  • Lost wages: No-fault insurance supplies the income you’ve been denied from earning because of the car accident.
  • Housekeeping costs: All household chores that you’re unable to perform as a result of the accident are covered by no-fault insurance.
  • Funeral expenses: Burial, cremation, and the cost of burying a dead casualty from the accident are catered for by no-fault insurance.

Also Read: How Does Uninsured Motorist Coverage Work?

What losses does no-fault insurance not cover?

These are the losses that aren’t covered by no-fault insurance:

  • Pain and suffering damages
  • Car damage and property repairs
  • Bodily injury to the other driver or pedestrians
  • Stolen belongings in the car

What are the pros and cons of no-fault insurance?

Pros

  • Reduces demand of lawsuits in courts
  • Swift payouts since faults aren’t determined
  • Covers a wide range of accident-related costs

Cons

  • Higher premiums
  • Little or no punishments for at-fault drivers

When to file lawsuits in no-fault states

Lawsuits for third-party claims are only allowed when an accident hits a certain threshold of severity. There are two such severe instances where drivers are allowed to sue others for compensation – verbal threshold and monetary threshold.

Verbal threshold

Victims of car accidents are allowed to file a personal injury lawsuit seeking financial compensation when there is significant injury or scarring as a result of an accident.

Suffering the loss of a limb, fractures, death, disfiguration, severe damage that causes failure of body organs, and the loss of a fetus entitles you to use a verbal threshold to file a third-party claim.

Monetary threshold

The monetary threshold comes into play when the casualty of an auto accident has medical expenses or lost wages that exceed the monetary limit set by the state.

Each no-fault state has a limit on medical costs that can be spent by individual victims of auto accidents.

If your state has a monetary threshold of $6,000 and the cost of your surgery and all drugs cost $6,500, you’re eligible to file a lawsuit against the other driver’s liability coverage on the grounds of a monetary threshold.

The dollar amount of these thresholds varies in no-fault states. In a case where the medical bills seem too much, do well to ask your insurance agent about the monetary threshold in your state.

Is there a deductible for no-fault insurance?

All no-fault states have a deductible. There is a deductible for using your PIP coverage, also known as no-fault insurance. The usual deductible amount selected by drivers is around $500 to $1,000.

Drivers can select the amount of deductible they want for their no-fault insurance, as it reflects the amount of financial risk they’re willing to undertake when taking out their PIP coverage.

A higher deductible would mean that you pay low premiums, while a low deductible will increase your premiums.

A deductible is the amount you have to pay out of pocket when filing a claim before your insurer writes you a payout check.

Related: How Does Car Insurance Deductible Work?

Why is no-fault insurance necessary?

No-fault insurance is necessary because it drastically reduces the lawsuit demands for car insurance claims on the court system, as there’ll be no need to prove fault or file a claim against the other driver’s insurance except where cases of monetary and verbal threshold are met.

No-fault insurance also became necessary because it shortens the amount of time for injured persons to receive settlement offers from their car insurance companies since there’s no need for a claims adjuster to determine who is at fault.

Tips for purchasing no-fault insurance

Let’s go over some tips to consider when choosing no-fault insurance.

Know the minimum requirement of your no-fault state

All no-fault states have minimum insurance requirements for PIP coverage. Some states have minimum requirements as low as $4,500 and others have requirements as high as $50,000.

It’s best to consider the requirements found in all no-fault states and settle in one that has a convenient minimum coverage for you.

Factor in your deductible

Knowing that a high deductible results in low premiums and vice versa, carefully select the deductible you can afford to pay out of pocket when filing a claim.

Seek cheaper rates from other carriers

Feel free to make inquiries on other car insurance companies and sample their quotes to see if you could get cheaper rates than your current carrier.

Also Read: How to Get Lower Car Insurance Rates

Bryan Grey
Bryan Grey
Bryan is a car insurance writer that shares insightful auto insurance advice to help car owners make the best of different car insurance policies available to them.
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