No Fault Insurance

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Internationally; “no fault insurance” is a generic terms which describes an insurance contract (or contracts) which are provided by an insurance company and the cover the insured party for losses under their coverage, regardless of which party is at fault in the incident or accident which generates those fault insurance

However in Canada, America and Australia the policy holder (and any passengers affected by an accident”) who obtains no fault insurance is not only entitled to be reimbursed by the insurance company irrespective of who is at fault, but is also limited in their means of pursuing additional damages through the civil justice system for losses that are caused by 3rd parties.

What is the purpose of no fault insurance?

The idea behind no fault insurance is to provide an amicable framework in which insurance losses can be settled without the need for litigation which can be both time consuming and expensive. The benefit to the insured party of this is that claims that are settled on a no fault basis are resolved quickly.

In these cases fault will still be determined and the usual practice is that the victim of the incident will be paid by their insurer but their premiums will remain the same, while the party at fault will be paid by their insurer but will be charged a higher premium in future as they represent a higher level of risk.

At first glance this would disadvantage the victim’s insurer because they make a payout but receive no increased financial benefit, whereas the at-fault party’s insurer will benefit from increased premiums. In practice over a large number of claims – this should balance out so that each insurer is taking roughly 50% of their claims from victims and the other 50% from culprits.

In the United States the majority of auto insurance is managed on the basis of proven negligence but there are twelve states and Puerto Rico which require policies to operate on a “no fault” basis. In these states the damages that can be sought from a 3rd party in civil claims are limited to either a financial (dollar value) threshold or a verbal (written definition) threshold in order to prevent unnecessary litigation for minor injuries or amounts.

In Kentucky, Pennsylvania and New Jersey policy holders may choose between the two systems and this is offered as a choice between “full tort” and “limited tort” (no fault insurance).

(To read more about no fault insurance outside of our glossary, please read our more detailed article on the subject.) 

No Fault Insurance – Additional Definitions

  • WIkipediaIn its broadest sense, no-fault insurance is any type of insurance contract under which insureds are indemnified for losses by their own insurance company, regardless of fault in the incident generating losses…
  • Princeton.edua system of automobile insurance where a party who is injured in an automobile accident recovers damages up to a specific amount against his own insurance company regardless of who was responsible for the accident…
  • Reference.comAlso called no-fault insurance. a form of automobile insurance designed to enable the policyholder in case of an accident to collect a certain basic compensation promptly for economic loss from his or her own insurance company without determination of liability…

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