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Who pays for no-fault?

Donna Ryun
OOIDA Information Services

The first state to adopt a no-fault insurance system was Massachusetts, which began using a modified version during the early 1970s. Since then, several other states decided to give it a try. Some kept the system, tweaking it here and there in hopes of improving its effects, while others ditched it because it never quite worked the way they’d hoped it would.

Today, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah have some form of no-fault insurance.

Colorado also had no-fault up until July 2003, but the statutes sunsetted after the state’s General Assembly failed to find a way to reform the system. What was the problem? Insurance premiums — the ninth-highest in the country, and the governor instructed lawmakers to either fix it or nix it. Colorado has now returned to the traditional tort system. Time will tell whether this was a good decision, but studies indicate that lower vehicle insurance rates will result.

Simply put, no-fault insurance is a system that requires drivers to maintain insurance for their own protection, aka Personal Injury Protection or P.I.P., and limits their ability to sue other drivers for damages as the result of an accident.

In no-fault states, each insurance company pays for its own customer’s damages, up to the specified limits of the individual’s policy, without regard to who was actually at fault for the accident.

With a pure no-fault system, nobody would be able to sue; however, none of the no-fault states use a pure no-fault system. Because most Americans believe that negligent motor vehicle operators should be held accountable for their actions, no-fault states have enacted modifications to their individual systems.

These modified systems allow for the right to sue for severe injuries and punitive damages with certain limitations. In these cases, the severity of the injury determines the “threshold,” which, once reached, allows the injured party to sue for pain and suffering. These thresholds can be determined by either the seriousness of the injury (verbal threshold), or the dollar amount of the insured’s medical costs (monetary threshold).

Some no-fault states use a “choice” no-fault system in which drivers may choose whether they want to be insured under the tort system where they can sue for damages or the no-fault system where they give up the right to sue.

Although the benefits provided under P.I.P. may vary significantly from state to state, generally medical expenses, loss of income, loss of services that the insured can no longer provide, rehabilitation expenses, death benefits and funeral expenses are included in the coverage. Typically, benefits are also provided for family members and passengers riding in the insured’s vehicle.

Many people wonder why the no-fault states didn’t leave well enough alone and simply use the traditional tort system.

Supporters of the no-fault system thought it would reduce legal costs and clear clogged courtrooms caused by frequent litigation.

Many lawmakers felt that being able to recover losses from one’s own insurance provider would hasten compensation for the accident victims and eliminate the need for attorneys. They felt that it would also ultimately translate into lower insurance premiums for everyone.

That wasn’t the case for Colorado, and for a number of other states as well. On average, insurance premiums in no-fault states are 25 percent higher than in states using the traditional tort system. In addition, there’s actually been no reduction in litigation costs because insurers are now fighting off lawsuits brought by their own customers for failure to pay no-fault benefits.

It’s confusing, isn’t it? Well, it gets worse. Consider this: What if you live in a state that uses the traditional tort system where there’s no P.I.P. coverage, and you become involved in an accident within a no-fault state? Recently, I received a letter from a member who faced this situation in the no-fault state of Michigan:

“I was sitting in the left turn lane when an eight-axle flat bed tried to make a right turn. The driver ended up being young and inexperienced; he was going way too fast to make the turn … estimated speed between 35 and 40. He jackknifed the truck … lost control and slammed into the front and left side of my ’99 Pete, causing over $10,000 in damage.”

Because Michigan is a no-fault state, the at-fault driver’s insurance company paid nothing to fix our member’s truck. Luckily, our member had the good business sense to carry physical damage coverage on his truck, so his own insurer picked up the tab — except for the $1,000 deductible and more than two weeks of lost wages. When all was said and done, our member had out-of-pocket expenses of nearly $5,000.

So who actually pays for no-fault? Well, I suppose the insured residents of no-fault states in which premiums have gone through the ceiling would say that they pay for it.

However, I know of at least one OOIDA member who lives in a traditional tort system state who would say that he paid for it when he was unlucky enough to become involved in an accident with a driver from a no-fault state.

“I hope this letter sparks some interest,” he wrote. “Owner-operators need to know the risks they are taking when traveling in these states.”

We think that’s good advice.

If you have questions about doing business as an owner-operator and/or an independent driver, please e-mail them or send them to me at PO Box 1000, Grain Valley, MO 64029. We can’t publish all of your questions in Land Line, but you will receive a response, even if your letter is not published.