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Most U.S. states have a "traditional tort" liability system for auto insurance in which recovery is governed by principles of provable negligence. However, twelve U.S. states and the Commonwealth territory of Puerto Rico either require policyholders, or give them the option, to operate under a "no-fault" scheme in which individuals injured in automobile accidents are limited in their ability to seek recovery from other drivers or vehicle owners involved in an accident. In the case of economic (medical and wage-loss) damages, most no-fault systems permit injured parties to seek recovery only for damages that are not covered by available first-party insurance benefits.
In the case of non-economic (pain-and-suffering) damages, most no-fault systems permit injured parties to seek compensation only in cases of exceptionally "serious" injury, which can be defined in either of two ways:
- A quantitative monetary threshold that sets a specific dollar (or other currency) amount that must be spent on medical bills before a tort is allowed. Disadvantages of this threshold are: (1) that it can encourage insureds (and their medical providers) to exaggerate medical costs through over-utilization, and (2) that, unless indexed, it can become ineffective over time because of inflationary effects on medical costs.
- A qualitative verbal threshold that states what categories of injuries are considered sufficiently serious to permit a tort (e.g., death, or permanent disability or disfigurement). The advantage of the verbal threshold is that it removes any incentive to inflate damage amounts artificially to meet some preset monetary loss figure. The primary disadvantage is that broad interpretation by the courts of the threshold can lead to over-compensation.
In three U.S. states - Kentucky, New Jersey, and Pennsylvania - policyholders are permitted to choose between traditional tort and no-fault recovery regimes. Under such systems, known as "choice" or "optional" no-fault, policyholders must select between "full tort" and "limited tort" (no-fault) options at the time the policy is written or renewed; once the policy terms are set forth an insured may not change his/her mind without rewriting the policy. In both Kentucky and New Jersey, policyholders who do not make an affirmative choice in favor of either full tort or limited tort are assigned the no-fault option by default; whereas in Pennsylvania, the full-tort option is the default.
No-fault insurance has the goal of lowering premium costs by avoiding expensive litigation over the causes of accidents, while providing quick payments for injuries. However, critics of no-fault argue that it does not punish reckless or negligent drivers sufficiently through jury awards or legal settlements, and that some legitimate victims with subtle handicaps find it difficult to seek recovery under no-fault. In response, proponents of no-fault insurance point out that automobile accidents are inevitable and that at-fault drivers therefore should not necessarily be punished; moreover, they note that the presence of liability insurance insulates reckless or negligent drivers from financial disincentives of litigation, and that, in regions with high numbers of uninsured motorists, at-fault parties are often "judgment proof" (i.e., unable to pay their liability damages) in any case. Another criticism is that some no-fault jurisdictions have among the highest automobile-insurance premiums in the country, but this may be more a matter of effect than cause (i.e., the financial savings from no-fault may simply make it more popular in areas with higher automobile-accident risk).
Several U.S. states have experimented with and repealed their no-fault laws. Twenty-four states originally enacted no-fault laws in some form between 1970 and 1975. Colorado repealed its no-fault system in 2003. Florida's no-fault system sunset on October 1, 2007, but a new no-fault law was passed by the Florida legislature, creating a new no-fault system as of January 1, 2008.
In at least one state, New York, the no-fault plan suddenly and unexpectedly resulted in a flood of litigation beginning around 1995 and continuing unabated to 2007 on. As documented by the New York State Insurance Department and the New York Court of Appeals, a billion-dollar-a-year "no fault fraud industry" has emerged, in which criminal rings recruit conspirators - often immigrants - to pile into automobiles which are to be involved in deliberate or staged accidents. The alleged victims are subsequently referred to compliant "medical clinics" which supply unnecessary, questionable or redundant treatment or medical supplies. Medical bills are sent en masse to no-fault insurers, and when payment is denied, a suit is commenced by attorneys which apparently specialize in just this kind of claim.
In 2002, the New York State Insurance Department amended the no-fault regulations to shorten the time period in which claims must be reported, from 90 days to 30 days; the new regulations also reduced the time in which medical bills must be submitted to insurers, from 180 days after treatment, to 45 days. According to the Insurance Department, these revised regulations have helped to reduce the number of fraudulent claims.
Nevertheless, no-fault litigation is reported to constitute 25 percent of all lawsuits filed in the New York City Civil Court.
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