When it comes to state-required coverage, auto insurance is divided into two categories:
- Liability. In this case, fault is assigned to one of the drivers. The at-fault driver's insurance covers all damages for the other driver. In addition, the driver who is not at fault can sue the driver for pain and suffering, lost wages, medical bills and more.
- No-fault. In states with no-fault insurance, each driver recovers damage and financial loss from his own insurance company. No-fault states also limit the right to sue the driver responsible for the accident. In most cases, drivers may sue only in cases of severe injury or death, according to the Insurance Information Institute.
Twelve states have no-fault systems: Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah. Each state differs slightly on the terms and the right to sue.
Kentucky, New Jersey and Pennsylvania have "choice no-fault" laws, according to the Insurance Information Institute. Drivers in those states retain the right to sue for any auto-related injury.
How does no-fault insurance work?
In a no-fault insurance state, there are three main types of required coverage, according to a consumer guide published by the State of Michigan:
- Personal injury protection (PIP), which pays your medical bills if you're injured in an accident. It also covers a specified amount of lost wages. If you already have medical insurance, you can reduce this coverage to lower your monthly premiums.
- Property protection. This covers the damage your vehicle causes to others' property, such as fences, landscaping or buildings.
- Bodily injury/property damage. This covers defense costs and damages you have to pay (up to your policy limits) in the event you're held liable.
No-fault insurance has advantages and disadvantages. Some of the key advantages of no-fault insurance include:
- Guaranteed coverage. No-fault states guarantee you're covered for medical expenses (within your policy limits), regardless of who's at fault or whether the other driver is uninsured.
- Fewer frivolous lawsuits. No-fault insurance laws make it difficult to sue another driver, so you rarely have to worry about paying legal expenses stemming from an accident.
- Limited protection. Even if a driver is not at fault, he or she still is limited to the terms of the policy. This means some drivers may be forced to pay medical bills out of pocket, even if they weren't at fault.
- Potential for fraud. Florida, a no-fault state, has some of the highest rates of auto insurance fraud, according to a 2010 report by the National Insurance Crime Bureau. The limited ability for other drivers to sue and the guaranteed payouts from their own insurance policies can inspire fraudsters to stage accidents and collect payments for alleged injuries.