Key Takeaways:
- Understand the often underestimated financial implications of at-fault vs. no-fault insurance.
- There is a growing urgency to understand these distinctions – insurers are in the process of adjusting their pricing models, adopting more and more telematics, and refining their claims analytics, which can all impact your bottom line.
- Navigate the auto insurance landscape that includes state regulations, accident accountability, and algorithms that determine premiums and discounts.
Accident frequency is rising today, and it can be blamed on extreme weather, distracted drivers, and growing congestion on our roadways. From smart phones to severe storms, more vehicles are getting into accidents which directly impacts what consumers pay for auto insurance into the future.
While each state has its own set of statutes governing auto insurance coverage (at-fault vs. no-fault), consumers often misunderstand how fault is determined and how it can impact their coverage and their premiums for years to come.
In this article, we look at the fundamentals of at-fault vs no-fault insurance, as well as strategies on how to minimize premium increases, take advantage of possible discounts, and how to navigate the insurance landscape with confidence.
The Basic Differences Between At-Fault and No-Fault Insurance Coverage
In the 1970’s, the concept of no-fault insurance was pioneered by insurance companies as a way to simplify the claims process and reduce the number of contentious lawsuits. Since the traditional at-fault process (or tort system) could be lengthy as the insurance carriers investigate to determine fault, no-fault insurance was designed to streamline the process and provide prompt payment for medical expenses and lost wages following an accident.
Today, states determine how they govern the insurance industry and can adhere to strict at-fault or no-fault models or use a hybrid system of statutes.
Let’s look at basic differences:
At-Fault Insurance
- Fault – As determined by the insurance carriers, fault is assigned to the driver who is determined to be responsible for the accident and must cover the other party’s damages. This is a complex process – please see more information below.
- Legal action – The at-fault driver can be sued for damages beyond vehicle damage and medical expenses, e.g., pain and suffering.
- Lengthy process – Determining fault can be a long process and lead to delays in payment.
No-Fault Insurance
- Blame doesn’t matter – Regardless of who caused the accident, all drivers use their own insurance (including their personal injury protection or PIP coverage) to cover their own medical expenses and lost wages.
- Litigation is limited – Suing for damages is prohibited unless the driver and passenger(s) sustain injuries that cross a certain threshold (determined by state law). In most states that have no-fault insurance, you can no longer sue for pain and suffering.
- Property damage – Damage to vehicles and property is still covered by the person deemed at fault in most cases. No-fault insurance covers medical bills for you and your passengers, as well as:
- Funeral expenses
- Lost income
- Childcare expenses
- Survivor benefits
- Household expenses
Is All No-Fault Coverage the Same?
No. While ‘pure’ no-fault insurance is the law in nine states, at this point in time, including New York, Florida, and Massachusetts, several other states have hybrid insurance options:
- Choice No-Fault Insurance – allows you to opt out of no-fault coverage and purchase at-fault coverage instead. The premium may be less, but you are exposed to possible litigation if you are in an accident.
- Add-On Coverage – This would include a PIP option to ensure medical claims are covered without a long wait.
How Fault is Determined
If you are in an accident, it’s important to first ensure everyone is safe or, if someone is injured, to seek medical attention at once. Next, determining negligence is the key to who will be responsible for damages.
When insurance companies determine negligence, they use a variety of pieces of evidence, including:
- Police reports
- Statements from drivers and witnesses
- Photo images of any vehicle and property damage
- Laws that were broken during or preceding the accident
- Security or dashcam footage if available
- Telematics from the impacted vehicles if available
Insurance companies want to determine who breached their ‘duty of care’ and if any laws were broken, e.g., speeding, running a red light, etc.
Many states also require companies to use ‘comparative negligence’ or to determine if fault can be shared between all drivers involved. As an example, in a case where it is determined that drivers were jointly responsible (50%/50%), then insurance companies would prorate their compensation/coverage by 50%.
How Much Will Insurance Rates Increase Following an Accident?
While a number of factors are used by the insurance industry, some internal and some state law mandated, insurance premiums will almost certainly go up following an accident for one simple reason: you have exhibited that you represent a higher risk (even if the accident was not your fault).
An at-fault accident insurance rate increase or surcharge can range from 20% to as high as 80% and last from three to five years. Multiple factors are used to determine the extent of the increase, including severity of the accident (minor collision vs. bodily injury claim), your driving history, length of history with the company, and state laws that govern insurance companies and their ability to raise rates.
For no-fault insurance rates following an accident, rate increases may be less severe since the insurance company’s exposure may be less (reduced medical expenses, less legal exposure).
Check with your insurance company now to take advantage of discounts or safe driver incentives, such as accident forgiveness and good driver discounts. This may be beneficial in case you find yourself having an accident in the future, especially if facing increased scrutiny at renewal time or even the potential for non-renewal.
The Ripple Effect
Beyond increased premiums, accidents (especially one’s that are caused by risky behavior, e.g., speeding, etc.) can lead to a loss of discounts and safe-driver incentives, as well as higher deductibles.
Are Premium Increases Different by State?
Yes. Many states allow carriers full range in determining rate increases and other at-fault penalties, while some states, like North Carolina, have strict surcharge schedules that limit insurance companies when it comes to imposing arbitrary sanctions.
What Are Some Neutral Accident Scenarios
There are some accident scenarios that most insurance companies treat as neutral or non-chargeable and most likely won’t raise your rates astronomically. These include hit-and-run accidents where your vehicle is hit by someone who flees the scene, significant weather damage, like what’s caused by flooding, hurricanes, or wildfire, and wildlife collisions.
How Insurance Companies Assess Risk
Insurance companies use actuarial data to predict future behavior. Makes sense – over time, actuarial sciences have complied massive details on all sorts of behaviors and outcomes to support the insurance industry’s risk mitigation. Vast armies of actuarial scientists compile statistics and historical data that they then feed into predictive modeling tools to determine potential outcomes.
The data includes not only our repeatable behavior, but also socioeconomic factors that impact risk, including:
- Overall driving patterns
- Traffic patterns and congestion
- Rural vs urban environments
- Crime within zip codes
- Severe weather patterns
In short—they know us better than we know ourselves!
With this information, insurance companies use sophisticated analyses to determine our risk profile and how that translates into our auto insurance premiums.
Strategies to Minimize Premium Increases Before or Following an Accident
Let’s face it. Sometimes accidents can happen. What can you do to minimize any big premium increases whether you live in an at-fault or a no-fault state?
Check Accident Forgiveness
Ask your insurance company if they offer accident forgiveness. It’s become popular as a marketing differentiator over the last few years, so take advantage of it. It is typically reserved for long-time customers with excellent driving records and claims history, but it never hurts to ask.
Shop Around
It never hurts to shop around from one carrier to another. Why pay a premium if you can find a company that will charge you less? This is a good exercise following an accident, but also as part of an annual review to ensure you are paying the best price.
Get an insurance quote from einsurance.com and see if your driving record doesn’t get you a better price at a different company. You can find widely diverging premiums through a bit of research.
Increase Your Deductible
Once you have a higher rate, consider increasing your deductible. The higher the deductible, the lower the insurance premium. It means that you will pay more out of pocket if you have a future claim, but also a lower cost now. If you opt for this alternative, it’s highly recommended that you keep the amount of the deductible in a savings account so that it’s available when/if needed.
Take a Defensive Driving Course
Many insurance companies offer discounts for completing a certified defensive driving course (or senior driving course if you are over 50 years old). It is not only a good idea in light of the recent accident but also demonstrates to the insurance carrier that you are committed to reducing possible future risk.
Bundle Your Policies
Most people have multiple insurance policies, e.g., auto, homeowners, renters, life. Contact your insurance agent to see if they offer a discount for bundling your policies with one company. Almost all insurance companies offer this discount and are more than pleased to help you bring all of your policies under one company.
Improve Your Credit Score
Most companies look at your credit score as an indicator of risk aversion. Someone with a high credit score is considered to be responsible and risk adverse. Conversely, someone with a fair or low credit score is considered to be a potential risk problem.
It’s important to have a strong credit report demonstrating good repayment habits and zero late payments. Most companies are looking for a score of at least 670 but being in the mid- to high-700s or even 800s is even better. Access your free annual credit report from each of the three main agencies and make sure there are no current mistakes or problems.
Avoid Filing Small Claims
Each claim brings a potential rate increase. If possible, pay for damage out-of-pocket rather than filing a claim. That way if you have a large claim it will possibly minimize any scheduled rate adjustment.
Maintain a Clean Driving Record
A consistently clean driving history will be beneficial and can actually help your insurance rates go down over time. Even infractions such as expired tags demonstrate to the insurance company that you are ok with risk which is a negative in their book.
Looking to the Future
While states continue to change and update at-fault and no-fault laws, the insurance industry proceeds with a forward-looking view. For your part, you can continue to manage risk by understanding your state’s specific rules when it comes to fault and ensuring you are covered with the best insurance option available for your circumstances.
Should you find yourself in an accident, be sure to compare quotes regularly and find proactive ways to lower your rates when possible.
For the future, whether you live in an at-fault, no-fault, or hybrid state, technology is being used to make driving safer and thereby limiting claims by reducing accidents. Today, vehicles use telematics (where your vehicle collects and transmits safety and behavior data to you and to your insurance company), GPS, sensors, and technology-assisted driving systems that help reduce losses. The long-term consumer impact will hopefully be safer driving and less accidents.
Contact einsurance.com to evaluate auto insurance options and discover additional ways to save money.
