Insurance and No-Fault Insurance

By Daisy Rogozinsky
/
March 27, 2022

If you are a driver of a motor vehicle, it’s likely that you are required by law to have auto insurance. In some states, you will be required to have a specific type of auto insurance called no-fault insurance. In this article, we’ll explain what both of these concepts mean. 

Key Takeaways

  • Insurance is a contract between an individual and an insurance company in which the individual is financially protected and can be reimbursed for losses
  • The most common types of insurance are auto, home, health, and life
  • Insurance policies have three critical components: deductible, premium, and policy limit
  • No-fault insurance is a type of auto insurance in which the policyholder is not required to prove who was at fault for their accident in order to receive a payout
  • No-fault insurance is mandatory in 12 states 

What Is Insurance?

Insurance is a type of contract that an individual can enter into with an insurance company that allows them to obtain financial protection and reimbursement in the case of losses. A person can have an insurance policy for their property as well as for liability for damage or injury they might cause to somebody else. 

The most common types of insurance many people have include auto insurance, home insurance, health insurance, and life insurance. Of these, most people have at least auto insurance, as it is usually required by law for drivers. 

Insurance policies have three critical components:

  • Deductible - The deductible is an agreed-upon amount that insurance policyholders must pay out-of-pocket before the insurance will step in and compensate for a claim. These are intended to deter people from making many small claims.
  • Premium - An insurance premium is how much the policy costs, usually paid per month. The premium is typically determined by the insurance company’s assessment of an individual’s risk profile.
  • Policy limit - The policy limit is the maximum amount an insurance company is willing to pay under a policy.

What Is No-Fault Insurance?

No-fault insurance, also called personal injury protection insurance (PIP), is a type of auto insurance policy that can cover damages regardless of which party is at fault for the accident. This is different from other types of auto insurance which reimburse on the basis of who is deemed to be at fault. In contrast, all accidents covered under a no-fault insurance policy will receive reimbursement.

No-fault insurance is mandatory in 12 states and covers things like:

  • Medical expenses
  • Income loss
  • Funeral expenses

However, no-fault insurance does not pay for damage done to a vehicle or pain and suffering. 

Insurance in Motor Vehicle Accidents

With other types of auto insurance, part of the process of making a claim is proving that the other party is at fault. This can be a difficult process and even sometimes leads to civil lawsuits. However, no-fault insurance does not require this step. 

The procedure for submitting a claim is easier and quicker. Instead of filing a claim against the at-fault driver’s insurance or filing a lawsuit, you will always submit a claim to your own insurance provider. With this insurance type, you will not have the burden of proving to an insurance adjuster that the other party was at fault. 

Note that even if you do not live in a state that mandates no-fault insurance, you can nearly always add PIP coverage to a traditional auto insurance policy. 

Sources

  • https://www.investopedia.com/terms/i/insurance.asp
  • https://www.nationwide.com/lc/resources/auto-insurance/articles/what-is-no-fault-insurance
  • https://www.iii.org/article/background-on-no-fault-auto-insurance#:~:text=pushing%20up%20costs.-,The%20Different%20Auto%20Insurance%20Systems,Utah%E2%80%94use%20a%20monetary%20threshold

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