No-fault Insurance Explained

By Author: Marcus Stalder
Total Articles: 491
Comment this article

In the long-distant past, the law of the land was directly administered by the rulers. They sat as judges on all major disputes and dispensed justice as they saw fit. It was not until civilization spread a little that we saw anything like today's courts and lawyers emerged. This was a law-and-order strategy. Before courts, people used to resort to a little self-help to get what they thought they were owed. Blood feuds and riots were therefore quite common. Giving people "independent" judges to decide matters defused the violence and kept the peace. All we had to wait for was the inevitable corruption to die away. In theory, today's judges are to recuse themselves if they know any of the parties or have a financial interest in the outcome. Yet there's still great unhappiness with our legal system, many people blaming our law of tort for many of our economic ills. Attorneys are routinely attacked for distorting the legal system in order the maximize their profit rather than to protect the interests of their clients.

The real problem comes from the simple rule in tort that, if you cause loss or harm to another, you should ...
... pay money to that other to make good the loss. This sounds a great idea. It's financial responsibility in action. In a shop, if you break it, it's yours. The only problems are the delays in getting a case decided and the cost. There are too few judges to deal with all the cases efficiently. Months can therefore pass before it's your turn again to move forward a little. Then attorneys seem to think they can charge you for breathing the same air as you. So, to cut out all the delay and reduce costs, some twenty-four brave states decided to abandon the tort system in favor of no-fault. In effect, everyone in those states is self-insured. If you're injured in an accident or you need to repair your vehicle, your own insurance company pays out no matter who's to blame. The only question when you submit a claim is whether the amount you ask for is a reasonable estimate of the loss. This can usually be agreed quite quickly and life goes on.

In other countries, the no-fault system has produced major savings. With the need to pay attorneys almost completely removed and staff levels in the insurance companies reduced to a minimum, everyone enjoys excellent value for money. Unfortunately, our wise law-makers decided to add in a few zingers which have conspired to keep the premium rates among the highest in the land. As a result, we're down to only twelve no-fault states today plus Puerto Rico. It's a case of a good idea largely sabotaged in the implementation.

However, when it comes to pricing the car insurance rates, the measures and classifications are basically the same. No matter what the legal system for resolving claims, the insurers are still estimating the number of accidents and the total amount of losses. Once they have those numbers, the total is divided among their policy holders, they add their administration costs and profit margin, and there you have the final rate. Car insurance may sound like rocket science but it a Model T rocket.