Auto Insurance Laws

Auto insurance laws in the US are state-based, with each state determining its own system for regulating the provision of auto insurance. There are fundamentally two systems in operation today, the tort liability system and the no-fault system, but the ability to have either or both systems, or parts of each system, has resulted in the following four principal types of state existing today with respect to car insurance:

1. Tort states;
2. No-fault states;
3. Choice states; and
4. Add-on states.

The meaning of tort liability and no-fault insurance, and the particular auto insurance laws prevailing in each of the four types of state, is explained as follows.

Tort States

A tort is a civil wrong, not arising out of contract, which can be redressed by an award of damages through a lawsuit. An example of a tort is the action of a driver who runs a red light through inattention, collides with another car which had right of way, and causes bodily injury to the driver of that car as a result of the collision. In this example the injured driver may sue for damages caused by the collision, such as medical expenses, loss of earnings, rehabilitation expenses and pain and suffering.

A tort may also be a criminal wrong (such as the driver in the example above running the red light intentionally), but the primary focus of tort law is the redress of civil wrongs.

The basis of a lawsuit against the inattentive driver would be negligence. According to the Legal Information Institute, a prima facie case of negligence is established if it can be shown that the following five elements were present at the relevant time:

1. A legal duty to exercise reasonable care;
2. A failure to exercise reasonable care;
3. Actual physical harm caused by the failure;
4. Actual damages from the physical harm; and
5. Proximate cause (the physical harm gives rise to a legal liability).

Tort states with respect to auto insurance are those in which the legal systems permit lawsuits to be taken in order to redress civil wrongs arising out of car accidents. There are 28 states which have adopted a tort system for auto insurance, listed as follows. Each state name is also a link to the state insurance office for that state, where more information can be obtained on the state's particular auto insurance laws:

No-Fault States

A no-fault state with respect to auto insurance is one in which the legal system of the state stipulates both of the following:

1. The payment of no-fault, first-party benefits (explained below); and
2. Limitations on the right to sue for torts arising out of car accidents.

Let's assume that you live in a no-fault state, and that you are involved in a car accident involving another car. Both yourself and the driver of the other car are injured, and it is acknowledged that the other driver is at fault. Instead of claiming damages from the other driver through a lawsuit (as in a tort state), you make a claim against your own insurance company for damages arising from the injuries you suffer. Your insurance company assesses the claim and makes payment to you. Similarly, the at-fault driver makes a claim against his insurance company, and that insurance company assesses the claim and makes payment accordingly. Consequently each insurance company is responsible for payment to its own policyholder, irrespective of who is at fault.

In the above example you are the first party, your insurance company is the second party, and the other driver is the third party in your claim. From the other driver's point of view, he is the first party, his insurance company is the second party, and you are the third party in his claim. In a no-fault state, each insured driver makes a claim against his own insurance company for first-party injury benefits, regardless of who is at fault. These benefits are referred to as ‘personal injury protection' (PIP) benefits. In no-fault states PIP insurance is mandatory, and each state enacts laws for both the type and minimum level of coverage which drivers are required to effect for PIP benefits.

No-fault states place limitations on the right to sue for damages due to personal injury. In general, lawsuits are prohibited in all but serious injury cases. This gives rise to thresholds above which a lawsuit may in fact be taken against an at-fault driver for damages arising from personal injury. Each state mandates its own type of threshold (referred to as the ‘tort liability threshold'), and that threshold will be either:

• A quantitative one, being a monetary threshold; or
• A qualitative one, referred to as a verbal threshold.

Under a monetary threshold, lawsuits are permitted if the aggregate value of damages equals or exceeds a specified dollar value. Under a verbal threshold, lawsuits are permitted if the injuries are of a particular nature. The term ‘verbal' is used as the threshold is descriptive (that is, describing the injuries which meet the threshold). In the case of a monetary threshold, each state specifies its own dollar limit, while in the case of verbal thresholds, each state specifies which injuries may be the subject of a lawsuit.

The personal injury protection (PIP) benefits of your policy provide coverage for yourself and any passenger in your car, and these can include some or all of the following:

1. Medical expenses;
2. Rehabilitation expenses;
3. Loss of earnings;
4. Funeral expenses; and
5. A survivor's benefit (payable to a spouse or dependents).

Most states expressly exclude liability for third-party property damage from their no-fault laws. In other words, the no-fault system does not extend to damage which you cause to another person's car or other property. In these states you are liable to be sued for any damage which you cause through your own fault to another person's property or car.

There are nine states which have adopted a no-fault system for auto insurance, listed as follows. Each state name is also a link to the state insurance office for that state, where more information can be obtained on the state's particular no-fault laws:

Each of the above states apply monetary thresholds for tort liability claims, with the exception of Florida, Michigan and New York which apply verbal (descriptive) thresholds.

Choice States

Choice states allow drivers to choose between tort liability and no-fault car insurance policies. Drivers who effect tort liability policies have coverage which permits them to sue at-fault drivers in car accidents. Drivers who effect no-fault policies make first-party claims on their own insurance companies in the event of a car accident, and their ability to sue at-fault drivers is limited as in no-fault states. Drivers can switch between the tort liability and no-fault systems, by cancelling their policies and effecting new ones.

There are three states which have adopted a choice system for auto insurance, listed as follows. Each state name is also a link to the state insurance office for that state, where more information can be obtained on the state's particular auto insurance laws:

• Kentucky
• New Jersey
• Pennsylvania

Kentucky applies a monetary threshold for tort claims, whereas New Jersey and Pennsylvania apply verbal (descriptive) thresholds.

In Kentucky and New Jersey, insurance applicants are assigned the no-fault system by default, unless they explicitly reject it in favor of the tort-based system. In Pennsylvania the opposite is true: applicants are assigned the tort-based system unless they explicitly reject it in favor of the no-fault system.

Add-On States

Add-on states with respect to auto insurance are those which provide for first-party PIP benefits, but they do not place any limitations on the ability to sue for tort liabilities. PIP benefits are consequently an ‘add-on' to their auto insurance policies, and those add-ons are either compulsory or optional depending on the state. In all states, however, regardless of whether the PIP coverage is compulsory or otherwise, drivers are able to sue at-fault drivers in the event of damages arising out of bodily injury due to a car accident. Drivers who have PIP benefits specified in their auto insurance policies consequently have the choice as to whether to claim PIP benefits from their own insurance company or to sue at-fault drivers under the tort laws of the state.

There are 10 states which have adopted an add-on system for auto insurance, listed as follows. Each state name is also a link to the state insurance office for that state, where more information can be obtained on the state's particular laws:

Optional PIP coverage applies in all of the above states, with the exception of Arkansas, Delaware, Maryland and Oregon, for which coverage is compulsory.

Districts & Territories

The District of Columbia operates under a unique system in which drivers have the option of effecting either a tort or a no-fault insurance policy. However, following a car accident a policyholder who originally chose a no-fault policy has a period of 60 days to decide whether to claim benefits under that policy or to file a suit against the other party under the tort system.

Puerto Rico operates a true no-fault system in similarity with the nine no-fault states detailed above. That is, policyholders may claim compensation for injuries from their own insurance companies, and they have limitations on their right to sue at-fault drivers (through the application of a monetary threshold).

September 5, 2010