There’s a good chance that you — like many drivers, rocket scientists, and Jeopardy! champions — have trouble fully understanding no-fault insurance.

Don’t worry, it’s not your fault.

This happens to be one of the more mysterious coverages around, one that only applies in a few states. Basically, no-fault insurance (unlike liability coverage) provides medical protection to drivers after an accident, regardless of who caused it. In other words, instead of each driver going through the at-fault driver’s insurance company, each one uses his or her own insurer.

But why do we deviate from the liability system at all? And why do only some states use no-fault? Does this system even work?

Let’s explore no-fault coverage a bit more to find some answers.

How no-fault insurance started

No-fault insurance was first proposed in the early 1930s, primarily because, from the 1900s to the 1930s, the number of cars in the U.S. had jumped from 8,000 to 23 million! That newfound traffic, increased accident risk, and overall driving chaos needed to be addressed.

Originally, the model for no-fault coverage was based on the workers’ comp system. And the main goal was to eliminate legal red tape by having insurance companies dole out compensation instead of forcing drivers to battle for it in court. However, the concept didn’t really catch on for about 20 years.

Why no-fault insurance gained popularity over liability coverage

In the 1950s and ‘60s, a rising number of car-accident lawsuits, increased medical costs, and hiked-up liability insurance rates led to a public outcry for a no-fault system. In 1971, Massachusetts became the first official no-fault state for car insurance. And, at no-fault’s peak, 24 states had chosen it over the liability system.

No-fault coverage cost less than liability policies. Plus, it was faster and more convenient. By 1992, 55 percent of no-fault claims were settled within 3 months, while only 25 percent of liability claims were resolved in this time frame.

Why many states have stopped using no-fault insurance

There hasn’t been a new no-fault state since 1976. In fact, over the last couple of decades, many states have switched back to the liability system. This is mostly because no-fault stopped saving people as much money.

One big problem was that healthcare providers began billing people’s no-fault car insurance before going through their actual medical insurance. Of course, this increased how much no-fault insurers had to spend on medical costs, which then drove up the rates they charged.

By 1993, no-fault policies were costing an average of $150 more than liability policies. And by 2004, no-fault drivers were paying 50 percent more than their liability counterparts.

Does it still make sense?

Today, there are only 12 no-fault states. But not everyone thinks this trend should be going down Dodo bird-style.

While opponents think it’s a waste of money, supporters of no-fault car insurance still believe it helps you avoid the legal system and get money for medical care faster than liability insurance.

Clearly, no-fault insurance has had its pros and cons. But what do you think? Voice your opinion in the comments below.

Related links

Check out more advantages and disadvantages of no-fault insurance as it stands today

Insurance 101 | Car insurance 101


about Alex

As copywriter for Esurance, Alex had professional experience in everything from film to literature to (thanklessly!) correcting the grammar in friends' emails. As a fervent Minnesota sports fan, he spends most of his non-writing time gently weeping into cereal bowls.