In most states, auto insurance functions under a traditional fault-based system. Insurance companies make payments based on each person's degree of fault in a particular motor vehicle accident. However, long and costly court battles are often required to determine who is at fault in many accidents. In an attempt to reduce this problem, thirteen states have adopted an alternative no-fault system of insurance. These "no-fault" states include Colorado, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah.

When you have an accident under a no-fault system, your insurer automatically pays for your damages, regardless of fault (up to the specified policy limit). In exchange for this guaranteed payment, you must give up some of your rights to sue the other driver involved in the accident. There are elements of no-fault in all auto insurance coverage. For example, medical payments and property damage are typically paid regardless of fault.

No-fault insurance is intended to reduce auto insurance premiums by reducing the number of automobile accident cases in the courts, by restricting recovery for pain and suffering damages, and by providing limited payment for losses.

Pure no-fault vs. modified no-fault
Under a pure no-fault system, your insurer would pay for any economic damages (such as medical bills, lost wages, etc.) up to the policy limit, and you would be completely prohibited from suing a negligent driver for "non-economic" damages (such as pain and suffering, loss of companionship, etc.). Presently, no states function under a pure no-fault system.

Instead, all thirteen no-fault states have adopted a modified no-fault system. This means that your insurer still pays for your economic damages up to the policy limit, but you may be allowed to sue for non-economic damages if the amount of these damages exceeds a specified tort threshold. The threshold can be either verbal or monetary (or a combination), and is designed to limit lawsuits to only the more serious injuries.

• Verbal threshold: In states that have a verbal threshold, lawsuits for non-economic injuries are limited to "serious" injuries or death. Serious is defined differently in each state, but it often includes broken bones, severed limbs, etc. Unless you meet the defined criteria for a "serious" injury, you are precluded from bringing a lawsuit against the other driver. Drawback: you may sustain a very serious injury that is not included in the defined verbal threshold.

• Monetary threshold: In states that have a monetary threshold, lawsuits for non-economic injuries are precluded unless a certain dollar amount in medical bills is reached. Pure no-fault supporters fear that people will make unnecessary visits to their medical provider in order to reach the threshold.

Benefits of a no-fault system
Supporters of no-fault insurance argue that a no-fault system offers many benefits, including the following:

• Quicker payment of claims by eliminating costly and time-consuming litigation over liability.
• No splitting of fees with lawyers.
• Lower insurance rates because expensive non-economic damage awards and legal fees required to defend liability claims are eliminated--legal fees currently account for 12% of premium costs.
• Reduction in the number of lawsuits.
• No subsidizing uninsured motorists; your insurer covers the cost of your medical bills.
• Lower rates mean that auto insurance is accessible to people of lesser means.

Drawbacks of a no-fault system
Opponents of no-fault insurance argue that the benefits are purely theoretical and that past performance has proved that no-fault is ineffective. Drawbacks include the following:

• No compensation for pain and suffering, paralysis, or other non-economic damages; arbitrary limits are imposed.
• Under pure no-fault and choice systems, bad drivers are protected because they cannot be sued for the damages they cause. Thus, there's no incentive to be a good driver.
• Rates are actually higher under no-fault. Regardless of theory, insurance premiums in no-fault states are on average 25% higher than in traditional liability states.
• There is no reduction in litigation costs under a no-fault system. The time and effort insurers once spent defending litigation claims is now spent defending lawsuits brought by their own insureds for failure to pay no-fault benefits. In modified no-fault states, tremendous time and energy is spent litigating over whether or not the tort threshold requirement has been met.
• Even your economic damages are limited by the terms of the policy. In traditional tort states, you are fully compensated for your loss by suing the driver responsible for your injuries. No-fault states have limits on liability, even for your basic economic damages. These limits result in people being forced to pay for any unpaid medical bills without recourse against the driver who caused the injuries.

What is "choice no-fault?"
Choice is another hybrid of the pure no-fault system. It creates two classes of insured drivers by retaining parts of both the pure no-fault and traditional fault-based systems. Versions of choice no-fault have been implemented in Pennsylvania and New Jersey. It is also the plan proposed by the federal government in its Auto Choice Reform Bill.

Under a choice system, drivers choose whether they want to be insured under a pure no-fault plan or retain some traditional tort rights similar to modified no-fault.

• If you choose the pure no-fault plan, you are unable to sue negligent drivers for non-economic damages, and you are immune from such suits yourself.
• If you choose to retain your traditional tort (personal injury suit) rights, you can sue other drivers who have also chosen to retain their tort rights, and in return they can sue you. Your traditional tort rights are not unlimited, however. If you have an accident with a driver who has opted for the pure no-fault option, you are unable to sue that driver.

By its design, choice no-fault tends to lead good drivers to pick the tort option (which is more expensive) and bad drivers to pick the pure no-fault option (which is less expensive). Critics charge that this unfairly punishes good drivers with higher rates and rewards bad drivers with no personal liability.