Tort (at Fault) Insurance and No-Fault Insurance: What’s the Difference

One of the greatest blessings of living in these wonderful United States is the ability to move across state lines unencumbered. It’s such a treat to reach an imaginary line on the horizon and see a sign in front of you saying, “Welcome to Idaho, It’s too Great to litter”—and looking in your rearview mirror seeing a sign saying, “Leaving Montana, the Big Sky Country, Please Come Again.” No stopping; no looking for registration or insurance papers; no passport or visa giving permission to travel; no wondering if your fruit or vegetables for lunch have to be discarded or eaten before you can proceed; no wondering if you are going to be frisked and have your firearms confiscated by a government official. Moreover, the transition is so seamless, most of us don’t even consider the validity of our vehicle insurance. We just merrily keep our cruise control on and the music playing as we enjoy the scenery gliding by.

Evolution of Vehicles

In 1769, self-powered road vehicles propelled by steam power were recognized by the British Royal Automobile Club and the Automobile Club de France as the first automobiles. The evolution of the automobile is one of amazement and wonderment which is well documented in an article found on www.thoughtco.com/who-invented-the-car- 4059932.

The various inventions relating to automobile history point us to the internal combustion engine, electric ignition, braking systems, lighting systems, springs and shock absorbers, etc. A few physical innovations of patents, licensing, rules of driving etiquette, and manufacturing brought up the social innovations necessary to meet mores associated with this miracle.

Daimler, the internal combustion engine inventor, gave license to Emile Levassor a wood working carriage builder to use his engine on his horseless carriage. In 1890 Levassor installed the first Daimler engine on his first car. Levassor also had formed a partnership with Armond Peugot whose car won the famous Paris to Marseille race of 1897. Unfortunately in that race one of the first fatal vehicle accidents recorded took the life of Emile Levassor.

It was apparent in the waning years of the 1800’s vehicles were going to play an important part of the societal fabric of the world, and in 1913 upon the introduction of the Ford assembly line this industry became the heart and soul of western civilization. By 1927 there were over 15 million Model T’s manufactured and on the roads. This didn’t even take into account vehicles being manufactured by other car makers.

Genesis of Vehicle Insurance

Even though the first car insurance went into effect February 1, 1898, written by Travelers Insurance Company, it wasn’t until 1925 when Connecticut decided to require drivers to certify they could meet financial responsibility limits set by the State that automobile insurance gained momentum. Until then, the methods for showing financial responsibility of $10,000 minimum was to provide a bond with $10,000 minimum; or, deposit bond, stocks or other negotiable financial instruments; or to deposit currency in this amount. Insurance policies issued by insurance companies quickly became the most efficient and convenient way of meeting this requirement. It was in 1927 that Massachusetts became the first state to make insurance mandatory (www.autoinsurance.org). It remained the only state to do so until 1957 when New York and North Carolina followed suit. By 2010 all states and District of Columbia except New Hampshire (www.nh.gov/safety/divisions/dmv/) required compulsory auto insurance coverage with the exception that in some states where businesses and government entities can meet the requirement through indemnity bonds in amounts established by the state.

For example, the State of Idaho has determined under Section 49-1229 pursuant to section 49-117, minimum coverage of $25,000 per person, $50,000 per occurrence for bodily injury, and $15,000 property damage financial responsibility can be met by certificate of insurance, or posting of indemnity bond with director of department of insurance for private individuals. This financial responsibility can also be met for motor carriers under section 49-1224. Self-Insurers with a certificate of self-insurance and certificate of liability insurance in a form the department prescribes when the department is satisfied that the person is possessed and will continue to be possessed of ability to pay judgments obtained against that person upon application, and providing a statement by a certified public accountant attesting the applicant’s net worth is five hundred thousand dollars, a list of vehicles, and a seventy dollar issue fee to be deposited in the state highway account. The motor carrier agrees to always be in compliance with the law according to section 49-1233 Idaho code. This section of the code lists intrastate motor carriers who qualify for exemption from having to carry liability and property damage insurance coverage required by the board. Examples of those qualifying–motor vehicles employed solely in transporting school children and teachers to and from school or to and from approved school activities, taxi cabs with limitations, motor vehicles controlled and operated by any farmer when used in transportation of his fam equipment or transportation of supplies for his farm, motor propelled vehicles for the sole purpose of carrying United States mail or property belonging to the United States–to name a few.
(http://www.insuranceguidelocal.com/cost-for-going-without-insurance-in-idaho-state).

Tort Insurance–At Fault Insurance

At the conception of vehicle insurance, policies issued were tort based because most conflicts between individuals relating to vehicle issues were not of a criminal nature. They were due to negligence or carelessness of automobile drivers so it made sense to underwrite automobile insurance policies to address these civil issues as torts.
A policyholder purchasing a tort insurance policy transferred a designated dollar amount of liability exposure to the insurance company so in the event of an accident, the policyholder would not have to bear the total cost of restitution for medical or physical damage nor the cost of defending himself through the litigation process. In addition to those expenses being covered, under tort coverage a driver and/or passengers in the other vehicle could sue for pain, suffering, and other out of pocket expenses attributable to the accident. This one provision is the capstone of tort coverage–there is no restrictions on lawsuits.

Beginning of No-Fault Insurance Policies

According to this Insurance Information Institute article, public records show in the 1960’s the traditional vehicle liability insurance system became the target of public criticism. The criticism centered around the time-consuming process of determining who is legally liable or at fault. This could become very expensive and could lead to a bottleneck in getting medical and hospital expenses paid to service providers and loss of income payments to injured parties.

This criticism grew and in the 1970’s several states introduced legislation for the first time which would allow injured parties to recover financial losses due to hospital and medical expenses from their own insurance company no matter who was at fault. It also allowed loss of income to be included in a settlement.

Twenty-four states including the District of Columbia now have laws which allow policyholders to obtain compensation for vehicle accidents from their own insurance companies. These states have some variation of no-fault insurance provisions: Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, Puerto Rico, Utah, Arkansas, Delaware, DC, Maryland, Oregon, Florida, Kansas, Kentucky, Massachusetts, Hawaii,Texas, Washington (there have been some changes to types of policies in force so would be wise to check your state’s status.)

No-Fault Insurance

The rationale for these states to write legislation for no-fault insurance revolved around the thought that if parties involved would file claims with their own insurance company no matter who was at fault, time and money could be saved since extensive discovery would not be involved before the claim could be handled. It would also reduce the number of inflated claims for medical duress and lawsuits. In its strictest form, the term no-fault applies only to states where insurance companies pay first party benefits and where there are restrictions on the right to sue.

In states with no-fault laws, parties to a claim are required to file a claim with their own insurance company regardless of who was at fault; consequently, a part of their auto insurance policy must include personal injury protection (PIP) to the minimum limits required by their state laws. When these minimums are met and injuries are beyond the limits, the injured party may deal with them in alternative ways.

Under no-fault, injured parties can sue for severe injuries and for pain and suffering but only if certain levels of severity are met.These levels may be expressed in

1) Verbal Thresholds. A plaintiff has to prove that a “verbal threshold” has been reached through death, dismemberment, significant disfigurement or significant scarring, displaced fractures, loss of a fetus, or permanent injury within a reasonable degree of medical probability, other than scarring or disfigurement;

2) Monetary Threshold. A dollar amount of medical bills has been reached which allows avenue of suits to apply; and

3) Zero Threshold. No limitations on seeking recovery for non-economic damages, i.e. pain and suffering or loss of consortium.

Each of these three options come with a different premium tag with zero threshold having the highest premium. Choosing verbal threshold can save premium but opens the possibility of costing much more when one becomes the victim in a vehicle accident.

Add-On

Another consideration given to insureds to purchase is an add-on provision. This allows first party benefits to be part of a traditional tort liability policy with no restrictions on lawsuits. This then is an aberration of a tort liability and is available only in
Arkansas, Delaware, D.C., Maryland and possibly Utah.

Bridge

We began this treatise with an exclamation of the freedom we have to move from state to state with no cares or concerns about meeting any particular need upon reaching state lines. Going unnoticed by most of us is the provision found in your insurance policy stating something like this, Out of State Insurance: If you have liability insurance under section 3 and if an insured is traveling outside the State of Idaho in a state or province which has compulsory insurance, financial responsibility, or similar law applicable to nonresidents, we will automatically provide the required minimum amounts and types of coverage if your policy does not already provide these coverages, but only to the extent required by law and only with respect to the operation or use of the insured vehicle in that state or province. The required coverage, however, will be excess over any other valid and collectible insurance” (City Squire Insurance Policy issued by Idaho Farm Bureau Mutual Insurance Company, p. 29, Section 111 provisions).
The airline slogan “You are free to move about this country” is appropo in this regard. You never have to worry whether it is a no-fault or a tort state you or leaving or entering.

Summary

When one begins to compare tort based insurance and no-fault insurance provisions, it quickly becomes apparent one could get mired in the minutiae of these two alternatives to providing insurance protection for the buying public. It is also apparent you may not have a choice between one or the other since the type of policy offered in your state is determined by law.

It certainly behooves an insured to seek the advice of a professional insurance agent when making this choice so you can take the guesswork out of the deliberations for purchasing insurance. This may be where just buying the cheapest insurance may be penny wise and dollar foolish, particularly in the event you live in a no-fault state. The choice you make upon purchasing insurance could have a tremendous economic consequence on you later down the road.

(Though not quoted verbatim, extensive credit is given to the Insurance Information Institute for information used in this article. Opinions and observations are strictly the author’s and in no way suggest collaboration with any other articles.)

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