14.1 The Fault System and Financial Responsibility Laws
In this section we elaborate on the following:
- The functioning of no-fault compensation systems for automobile accidents
- Forms of no-fault systems
- Arguments in favor of and against no-fault laws
- The purpose of financial responsibility laws
- How financial responsibility laws are satisfied
The Fault System
An issue debated extensively over the past several decades is whether or not to maintain a fault-based compensation mechanism for automobile accidents. In response to the debate, over half the states have passed mandatory first-party benefits (also known as no-fault) laws. Subject to various limitations, such laws require that insurers compensate insureds for the insureds’ medical expenses, lost wages, replacement service costs, and funeral expenses incurred as a result of an automobile accident; these are collectively referred to as personal injury protection (PIP) and medical payments (Med Pay)Compensation paid to insureds for medical expenses, lost wages, replacement service costs, and funeral expenses incurred as a result of an automobile accident. Under no-faultInsurance laws under which benefits are provided by insurers without regard to who caused the accident. laws, benefits are provided by insurers without regard to who caused the accident.
Under the no-fault concept, first-party benefits such as PIP are provided without regard to fault as a way to avoid legal battles. If you were involved in a multicar accident where tort law applied, a lawsuit between the parties likely would result. The suit would be an attempt to place blame for the accident, thereby also placing financial responsibility for the losses incurred. Under the no-fault concept, each injured party would receive compensation from his or her own insurance company. There would be no need to expend resources in determining fault. Furthermore, the worry of being hit by someone who does not have automobile liability insurance would be eliminated. You already have a form of limited no-fault insurance in the coverages that compensate for damage to your car (discussed later in the chapter). The no-fault PIP or Med Pay benefits extend first-party coverage to expenses associated with bodily injury.
No-fault automobile laws are not uniform, yet they typically fall into three categories. Table 14.3 "State Auto Insurance Laws Governing Liability Coverage (Financial Responsibility Laws), 2009" lists the laws in each state. Pure no-faultTheoretical insurance laws that would pay only specific damages (economic losses, such as medical expenses and lost wages), but these would be unlimited. exists only theoretically and would abolish completely the opportunity to litigate over automobile accidents. Only specific damages (economic losses, such as medical expenses and lost wages) would be available under pure no-fault, but these would be unlimited. Michigan’s no-fault law is closer to pure no-fault than are the laws of other no-fault states.
Table 14.3 State Auto Insurance Laws Governing Liability Coverage (Financial Responsibility Laws), 2009
|First-party Benefits||Restrictions on Lawsuits||Thresholds for Lawsuits|
|“Choice” no-fault state. Policyholder can choose a policy on the no-fault system or traditional tort liability. Verbal threshold for the Basic Policy contains lower amounts of coverage. The District of Columbia is neither a true no-fault or add-on state. Drivers are offered the option of no-fault or fault-based coverage, but in the event of an accident, a driver who originally chose no-fault benefits has sixty days to decide whether to receive those benefits or file a claim against the other party.|
Source: American Insurance Association as appeared in the I.I.I. Insurance Fact Book, 2002, p. 49.
Michigan’s plan, however, is an example of a modified no-fault law. Under a modified no-faultInsurance plan, in which rights to litigate are limited but not eliminated; generally, suit can be brought against an automobile driver only when serious injury has resulted from the accident or special damages exceed a given dollar amount. plan, rights to litigate are limited but not eliminated; generally, suit can be brought against an automobile driver only when serious injury has resulted from the accident or special damages exceed a given dollar amount, called a threshold. For nonserious injuries and those resulting in losses below the threshold, only no-fault benefits are available. Serious injuries, or those resulting in losses in excess of the dollar-value threshold, permit the injured party to take legal action, including claims for general damages (such as pain and suffering).
In states that adopted modified no-fault laws, as shown in Table 14.3 "State Auto Insurance Laws Governing Liability Coverage (Financial Responsibility Laws), 2009", there are two types of modification: (1) the verbal threshold, which describes the types of injuries for which the party at fault is considered liable, as in Florida, Michigan, New Jersey, New York, and Pennsylvania, and (2) the monetary threshold, which has a monetary limit under which no fault is assigned. When the claim is over this amount (the threshold in Massachusetts, for example, is $2,000), the at-fault system kicks in.
Some states do not limit rights to litigate but do require that insurers offer first-party coverage similar to what is available in no-fault states. An injured party can be compensated from his or her own insurer. The insurer in turn can sue the negligent driver. Rights to litigate are not affected. Auto plans that offer compensation to an injured motorist through the individual’s own insurer are called add-on plansAuto insurance plans that offer compensation to an injured motorist through the individual’s own insurer. or expanded first-party coverage.
Interest in no-fault grew from the belief that the tort system is slow, erratic in its results, and expensive considering the portion of the premium dollar used to compensate persons injured in automobile crashes.See Jeffrey O’Connell, “No-Fault Auto Insurance: Back by Popular (Market) Demand,” San Diego Law Review 26 (1989). Most studies regarding these aspects of fault-based laws are now old. Emphasis has turned recently to premium levels, as discussed. If the tort system could be bypassed, all the expenses of the process—including costs of defense and plaintiff’s counsel—could be eliminated. This would make more dollars available for compensation at no additional cost to insureds and perhaps even reduce the cost of insurance. Proponents of no-fault assert that enough money is spent on automobile insurance to compensate all crash victims, but that the tort system wastes funds on the question of fault. Therefore, the concept of fault should be abandoned and the funds should be used more effectively. Furthermore, proponents argue that evidence is weak (if it exists at all) that insurance premiums actually reflect loss potentials and therefore work to deter unsafe driving.
Opponents of no-fault argue that it is simply compulsory health insurance with restrictions on tort action. They observe that workers’ compensation was designed to reduce litigation by abandoning employers’ liability but that, in recent times, litigation in that field has been increasing. Opponents of no-fault assert that many people who favor no-fault do so primarily because they expect it will be cheaper than the present system when, in fact, it may cost more. A study by the Rand Corporation explains that opponents to the no-fault system argue that the system will reduce drivers’ incentives to drive carefully, and, in so doing, accident rates will increase.David S. Loughran, “The Effect of No-Fault Automobile Insurance on Driver Behavior and Automobile Accidents in the United States,” http://www.rand.org/cgi-bin/Abstracts/e-getabbydoc.pl?MR-1384-ICJISBN: 0-8330-3021-3, MR-1384-ICJ. Copyright © 2001 RAND. This research was conducted within the RAND Institute for Civil Justice.
Financial Responsibility Laws
Every state has some kind of financial responsibility lawLaw that acts to induce motorists to buy auto liability insurance so victims of their negligence will receive compensation. that acts to induce motorists to buy auto liability insurance so victims of their negligence will receive compensation. A typical law requires evidence of financial responsibility when a driver is involved in an accident or is convicted of a specified offense, such as driving while intoxicated. The simplest way to prove such responsibility is to have an auto liability insurance policy with specified limits that meet or exceed the minimum limits set by various state legislatures. The financial responsibility laws in the various states are shown in Table 14.4 "Automobile Financial Responsibility/Compulsory Limits by State, 2009". Insurers and consumer advocacy groups recommend a minimum of $100,000 of bodily injury protection per person and $300,000 per accident to avoid paying from your pocket in case of liability.Insurance Information Institute (III), The Insurance Fact Book, 2009, 66–67.
Table 14.4 Automobile Financial Responsibility/Compulsory Limits by State, 2009
|State||Insurance Required||Minimum Liability LimitsThe first two numbers refer to bodily injury liability limits and the third number to property liability. For example, 20/40/10 means coverage up to $40,000 for all persons injured in an accident, subject to a limit of $20,000 for one individual and $10,000 coverage for property damage.|
|Alabama||BI & PD Liab||25/50/25|
|Alaska||BI & PD Liab||50/100/25|
|Arizona||BI & PD Liab||15/30/10|
|Arkansas||BI & PD Liab, PIP||25/50/25|
|California||BI & PD Liab||15/30/5Low-cost policy limits for low-income drivers in the California Automobile Assigned Risk Plan are 10/20/3.|
|Colorado||BI & PD Liab||25/50/15|
|Connecticut||BI & PD Liab, UM, UIM||20/40/10|
|Delaware||BI & PD Liab, PIP||15/30/10|
|D.C.||BI & PD Liab, UM||25/50/10|
|Florida||PD Liab, PIP||10/20/10Instead of policy limits, policyholders can satisfy the requirement with a combined single limit policy. Amounts vary by state.|
|Georgia||BI & PD Liab||25/50/25|
|Hawaii||BI & PD Liab, PIP||20/40/10|
|Idaho||BI & PD Liab||25/50/15|
|Illinois||BI & PD Liab, UM||20/40/15|
|Indiana||BI & PD Liab||25/50/10|
|Iowa||BI & PD Liab||20/40/15|
|Kansas||BI & PD Liab, PIP, UM||25/50/10|
|Kentucky||BI & PD Liab, PIP||25/50/10|
|Louisiana||BI & PD Liab||10/20/10Minimum coverage requirements will increase to 15/30/25 on January 1, 2010.|
|Maine||BI & PD Liab, UM, UIM||50/100/25In addition, policyholders must also carry at least $1,000 for medical payments.|
|Maryland||BI & PD Liab, PIP,May be waived for the policyholder but is compulsory for passengers. UM||20/40/15|
|Massachusetts||BI & PD Liab, PIP, UM||20/40/5|
|Michigan||BI & PD Liab, PIP||20/40/10|
|Minnesota||BI & PD Liab, PIP, UM, UIM||30/60/10|
|Mississippi||BI & PD Liab||25/50/25|
|Missouri||BI & PD Liab, UM||25/50/10|
|Montana||BI & PD Liab||25/50/10|
|Nebraska||BI & PD Liab||25/50/25|
|Nevada||BI & PD Liab||15/30/10|
|New Hampshire||FR only, UM||25/50/25|
|New Jersey||BI & PD Liab, PIP, UM||15/30/5Basic policy (optional) limits are 10/10/5. Uninsured and underinsured motorist coverage not available under the basic policy but uninsured motorist coverage is required under the standard policy.|
|New Mexico||BI & PD Liab||25/50/10|
|New York||BI & PD Liab, PIP, UM||25/50/10In addition, policyholders must have 50/100 for wrongful death coverage.|
|North Carolina||BI & PD Liab, UM, UIM||30/60/25|
|North Dakota||BI & PD Liab, PIP, UM||25/50/25|
|Ohio||BI & PD Liab||12.5/25/7.5|
|Oklahoma||BI & PD Liab||25/50/25|
|Oregon||BI & PD Liab, PIP, UM||25/50/10|
|Pennsylvania||BI & PD Liab, PIP||15/30/5|
|Rhode Island||BI & PD Liab, UM||25/50/25Instead of policy limits, policyholders can satisfy the requirement with a combined single limit policy. Amounts vary by state.|
|South Carolina||BI & PD Liab, UM||25/50/25|
|South Dakota||BI & PD Liab, UM||25/50/25|
|Tennessee||BI & PD Liab||25/50/10Instead of policy limits, policyholders can satisfy the requirement with a combined single limit policy. Amounts vary by state.|
|Texas||BI & PD Liab||25/50/25Minimum coverage requirements will increase to 30/60/30 on January 1, 2011.|
|Utah||BI & PD Liab, PIP||25/65/15Instead of policy limits, policyholders can satisfy the requirement with a combined single limit policy. Amounts vary by state.|
|Vermont||BI & PD Liab, UM, UIM||25/50/10|
|Virginia||BI & PD Liab, UM||25/50/20|
|Washington||BI & PD Liab||25/50/10|
|West Virginia||BI & PD Liab, UM||20/40/10|
|Wisconsin||FR only, UM||25/50/10|
|Wyoming||BI & PD Liab||25/50/20|
Source: Property Casualty Insurers Association of America; state departments of insurance.
Several states also have unsatisfied judgment fundsState organizations that provide compensation in situations when an injured motorist obtains a judgment against the party at fault but cannot collect because the party has neither insurance nor resources. to provide compensation in situations when an injured motorist obtains a judgment against the party at fault but cannot collect because the party has neither insurance nor resources. The maximum amount the injured party may claim from the fund is usually the same as that established by the state’s financial responsibility law. When the fund pays the judgment, the party at fault becomes indebted to the fund and his or her driving privilege is suspended until the fund is reimbursed.
Financial responsibility laws increased the percentage of drivers with auto liability insurance, but many drivers remained uninsured. Therefore, about half the states require evidence of insurance prior to licensing the driver or the vehicle. Unfortunately, in many such states, only about 80 or 90 percent of the drivers maintain their insurance after licensing. Even a compulsory auto liability insurance law does not guarantee that you will not be injured by a financially irresponsible driver. A compulsory auto liability insurance lawLaw that requires automobile registrants to have specified liability insurance in effect at all times. requires automobile registrants to have specified liability insurance in effect at all times; however, numerous drivers find ways to operate motor vehicles without insurance.
In this section you studied the major features of no-fault compensation systems and financial responsibility laws for automobile accidents:
- In the traditional at-fault system, an injured party is compensated by the liability coverage of the at-fault driver.
- Under no-fault laws, benefits are provided by insurers without regard to who caused the accident.
- No-fault takes three forms: pure no-fault, modified no-fault, and add-on plans.
- No-fault is backed by the belief that the tort system is slow and erratic and adds unnecessary expense in determining fault.
- Critics say that no-fault is a form of compulsory health insurance and reduces drivers’ incentives to drive carefully (thereby increasing accidents and premium costs).
- Financial responsibility laws induce motorists to buy auto liability insurance so that victims of their negligence will be compensated.
- State legislatures set minimum limits that must be carried in auto liability insurance.
- Unsatisfied judgment funds assist injured motorists who cannot collect from financially irresponsible liable parties.
- Discuss the forms of automobile no-fault laws presented in this chapter.
- What are the advantages and disadvantages of no-fault laws presented in this chapter?
- Explain the difference between a monetary threshold and a verbal threshold for no-fault laws.
- What is the purpose of financial responsibility laws?
- Automobile financial responsibility laws require you to have some minimum amount of auto liability insurance. If the purpose of liability insurance is to protect you from loss caused by your negligence, why should the law force you to buy it? Do you think this is a decision for you to make? Explain.