no-fault insurance

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No-fault insurance primarily refers to no-fault auto insurance which requires the insurance company to indemnify its policyholder for certain losses resulting from an automobile accident regardless of who caused the accident. The three players in the no-fault system are the first party which is the policyholder, the second party which is the policyholder’s insurance company, and the third party which is the other party or parties involved in the accident.

The losses or first-party benefits that the second party must cover range from a minimum of only the mandatory personal injury protection (PIP) to a comprehensive package that includes PIP, medical fees, lost wages, funeral costs, and other out-of-pocket expenses. For example,

  • In Michigan, Public Act 218 of 1956 requires PIP payment for all reasonable and necessary medical expenses for the policyholder’s lifetime. Effective July 1, 2020, Public Acts 21 and 22 of 2019 amended the law such that instead of a mandatory unlimited PIP medical coverage, policyholders can elect their maximum level of PIP medical coverage. PIP also pays lost wages for a maximum of three years after the date of the accident.
  • In New York, New York Insurance Law Section 5102 defines first-party PIP benefits to include all reasonable and necessary medical and rehabilitation expenses related to the accident, 80% of lost wages, a maximum of $25 a day for a year after the date of the accident for other reasonable and necessary expenses related to the accident, and a $2,000 death benefit.

Another characteristic of no-fault insurance is that first parties are restricted by either a monetary threshold or a verbal threshold from suing third parties for tort compensation for pain and suffering. Monetary thresholds allow first parties to file lawsuits when their medical expenses meet a statutory amount. For example, Kentucky Revised Statutes 304.39-060 sets Kentucky’s monetary threshold at $1,000. Verbal thresholds allow first parties to file lawsuits when their injuries satisfy the criteria for serious bodily injuries. For example, New York Insurance Law Section 5102(d) defines serious injury to include certain conditions such as death, significant disfigurement, and significant limitation of use of a body function or system.

Variations on the no-fault system include add-on and choice no-fault. Add-on systems, like Oregon, have no-fault systems’ first-party benefits without its restrictions on lawsuits. Choice no-fault systems, like Kentucky, allow policyholders to elect either no-fault or tort liability.

[Last updated in August of 2020 by the Wex Definitions Team]