What is No-Fault Insurance and Why Should You Care?

Therea re currently 12 states that are "no fault" states: Washington D.C., Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jewrsey, New York, North Dakota, Pennsylvania, and Utah. If you live in one of these states, you need to understand what will happen to you if you're involved in a car accident. Even if you don't live in a no-fault state, every state has "no fault" laws. Ignorance could cost you big-time.

You Pay For Your Own Damages First

When you have no-fault insurance, your insurance company pays for your damages first. If and when you run out of coverage, the other driver's insurance will pick up the difference - but only in certain circumstances. In general, your own insurance policy is the policy that will pay out for any damages caused to you.

This is crucially important because, if you lack insurance coverage, you won't get the claim check you're expecting. It also has implications upon policy renewal. 

PIP

No fault insurance is often called "personal injury protection" or PIP. While PIP coverage varies a bit by state, it generally includes coverage for injury-related expenses like medical costs, compensation for loss of services, lost wages, funeral expenses and related death benefits.

The amount of PIP coverage required in each state also varies, with some states not mandating any coverage at all. No state is a pure "no fault" state, but some states require a certain minimum amount of damage before you can sue the other party (i.e. before your insurance company can sue the other insurer for damages).

Benefits

One of the major benefits of no-fault insurance is the decreased litigation costs. If you're the person who is actually "at fault" (i.e. you caused the accident), no-fault insurance benefits you, because you effectively don't have to take responsibility for the accident.

The other driver's insurance will cover the damages. Your premiums will increase, but not as much as under a state that uses traditional liability rules.

Disadvantages

The disadvantages of no-fault insurance are many - specifically, you're penalized for being the innocent party in an accident. Because no-fault insurance assumes that no one is at fault in the accident, your insurer pays out the claim. 

Because your insurer pays out the claim, your insurance premiums often go up. Yes, it's not fair, but the insurer has to raise your premiums. Why? Because they're legally not allowed to go after the other insurer for the money.

This is where no-fault insurance works against you. Should you carry the minimum amount of no-fault coverage then - in the hopes that damages exceed the state minimum and your insurer can go after the other driver's insurance company? It's a risky way to play it because some states simply don't allow insurers to do this. You need to check with your agent about the specific rules governing the no-fault laws where you live.

If you can minimize the impact on your premiums by keeping PIP coverage at the bare minimum, then go for it. If you live in a state that doesn't allow your insurer to go after the other driver's insurer for damages, you might be better off raising your PIP coverage just so that you get all of your damages paid for - then you can shop around with other insurers to avoid having your premium increased at renewal.

Gillian Kearney has extensive experience as in insurance rep. Her articles mainly appear on personal finance and money saving blogs. Visit Monkey.co.uk to learn more.