The term "no-fault" auto insurance often is used loosely to denote any auto insurance program that allows policyholders to recover financial losses from their own insurance company, regardless of fault. But, in its strictest form, no-fault applies only to state laws that both provide for the payment of no-fault first-party benefits and restrict the right to sue.

Under current no-fault laws, motorists may sue for severe injuries and for pain and suffering only if the case meets certain conditions. These conditions, known as a threshold, relate to the severity of injury. They may be expressed in verbal terms (a descriptive or verbal threshold) or in dollar amounts of medical bills, a monetary threshold. Some laws also include the days of disability incurred as a result of the accident. (Pure no-fault proposals go one step further, abolishing the right to sue in most cases.)

Because high threshold no-fault systems restrict litigation, they tend to reduce costs and delays in paying claims. Verbal thresholds eliminate the incentive to inflate claims that may exist when there is a dollar "target" for medical expenses. However, verbal threshold may be eroded over time by broad judicial interpretation of the verbal threshold language, pushing up costs.

Currently thirteen states and Puerto Rico have no-fault auto insurance laws. Florida, Michigan, New Jersey, New York and Pennsylvania have verbal thresholds. The other eight states use a monetary threshold: Colorado, Hawaii, Kansas, Kentucky, Massachusetts, Minnesota, North Dakota and Utah. Three states have a "choice" no-fault law. In New Jersey, Pennsylvania and Kentucky, motorists may reject the lawsuit threshold and retain the right to sue for any auto-related injury.

Studies have shown that strong verbal threshold no-fault laws reduce fraudulent medical claims.

In addition to major differences among states in the tort threshold, there are also variations in first-party no-fault benefits. Michigan, for example, has no limit on medical benefits while Massachusetts limits first party benefits to $8,000.