No-Fault Insurance

Study guides: Exam 6C, Exam GI-201

No-Fault Insurance in automobile insurance means that an injured person recovers defined benefits from their own insurer, regardless of who caused the collision. It trades the right to sue for certainty and speed of payment. Canadian schemes are almost all partial ("threshold" or "add-on") no-fault: first-party accident benefits are payable immediately, and the right to sue survives only above a threshold.

Pure no-fault abolishes the tort action entirely — Quebec's public bodily injury scheme and Manitoba's are the Canadian examples. Partial no-fault keeps tort for serious injury (Ontario, the Atlantic provinces, Alberta in modified form). Add-on provides first-party benefits with no restriction on suing at all.
The arguments for: benefits paid within weeks rather than after years of litigation; every injured person is compensated, including those at fault; transaction costs fall sharply because legal and adjusting expense on contested liability disappears; premiums are more stable because severity is capped by a benefit schedule rather than by juries.
The arguments against: the negligent driver bears no financial consequence, weakening deterrence (Moral Hazard); benefit schedules under-compensate the seriously injured relative to full tort damages; the right to sue is a legal right being removed; and disputes migrate from liability to entitlement — whether an injury meets a definition — so litigation is reduced rather than eliminated.
First-party structure changes the incentives on the insurer too. Under tort, the insurer defends against a stranger's claim; under no-fault it adjudicates its own policyholder's claim, which is a good faith and conduct relationship rather than an adversarial one.
Actuarially, no-fault shifts cost from severity-driven and volatile (jury awards, tail development) to frequency-driven and schedule-bounded, which shortens the tail and improves reserve predictability — the reason no-fault provinces have less reserve development risk in auto.

Same Accident, Three Systems A driver is injured by another driver's negligence: $\$18{,}000$ of medical and rehabilitation cost, $\$25{,}000$ of lost income, and pain and suffering a court would value at $\$45{,}000$ . Describe the recovery under (a) pure tort, (b) pure no-fault with a benefit schedule paying medical costs in full and $80\%$ of income loss, and (c) threshold no-fault where the injury does not meet the threshold.

Answer (a) Pure tort. The driver sues and, if liability is established, recovers all three heads:

$\$18{,}000 + \$25{,}000 + \$45{,}000 = \$88{,}000$

less any contributory negligence, after two to four years, net of legal costs.

(b) Pure no-fault. Paid by the driver's own insurer, promptly, with no litigation:

$\$18{,}000 + 0.80(\$25{,}000) = \$38{,}000$

There is no pain-and-suffering award, and the $20\%$ income gap is uncompensated. The driver is $\$50{,}000$ worse off but was paid within weeks and would have been paid even if at fault.

(c) Threshold no-fault, below threshold. The accident benefits of $\$38{,}000$ are payable; the tort action for the $\$45{,}000$ is barred because the injury does not meet the threshold. Total $\$38{,}000$ .

The comparison is the whole no-fault debate in one table: the system that pays most pays slowest and only to the not-at-fault, and the system that pays fastest and most broadly pays least to the seriously injured. Which is preferable is a policy judgement; the actuary's contribution is that (b) and (c) are far cheaper and far more predictable to reserve.