Insurance coverage should give you incentives to act on good behavior. But when any accident -- even one that's not your fault -- forces you to file with your own insurance company, how are you rewarded for trying your best?

Unfortunately, that's largely the situation that drivers face in about a dozen states across the country. With no-fault auto insurance, if you're involved in an accident, you usually have to make a claim against your own insurer for medical bills and damage to your car. And in many states, unless your accident is serious, you may not be able to collect from the other driver's insurance company at all -- even if the other driver was entirely at fault.

Fewer lawsuits, less justice
States that have no-fault auto insurance laws point to the costs of filing and defending accident-related lawsuits. By limiting the rights of accident victims to sue for damages, those states argue that reduction in the use of court resources and increased efficiency in accident claims handling for insurers justify the inherent unfairness involved.

Yet the price of such laws is that they prevent drivers from reaping the rewards of driving safely. Under most insurance systems, having an accident that isn't your fault won't affect your insurance rates -- you can simply collect from the other driver's insurer. But in a no-fault system, you often have no choice but to file a claim and collect from your own insurance company. Then, your insurer may use your claims history to increase your rates or even cancel your coverage -- all because of events that were beyond your control.

Questionable benefits
In addition, even the argument about less litigation leading to more efficiency and lower premiums may not be true. Many states with no-fault insurance suffered from huge numbers of fraudulent medical claims that drove up rates.

That led to some states dropping no-fault entirely. The year after Colorado allowed its no-fault auto insurance law to expire, the average insurance premium fell by $83. Florida is currently going through a similar debate, with its no-fault law having expired on Oct. 1 and scheduled to come back into effect on Jan. 1, 2008. Several insurance companies, including Allstate (NYSE:ALL), Progressive (NYSE:PGR), Travelers (NYSE:TRV), and AIG (NYSE:AIG), have supported efforts to end no-fault insurance in Florida.

Moral hazard
It's true that trying to figure out who's at fault in an accident is a time-consuming and expensive process. Litigating every minor fender-bender would quickly overwhelm the courts. And jury awards in cases involving injuries are sometimes extremely high.

However, eliminating fault entirely creates a problem that's potentially even more costly. The risk of being found at fault for an accident encourages bad drivers to drive more safely. When the law disregards who causes accidents, reckless drivers stop getting punished for accidents, forcing safe drivers to bear much of the cost. Until that fundamental injustice is resolved, no-fault auto insurance will continue to stir controversy as unjust.

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Fool contributor Dan Caplinger does his best to avoid accidents. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy leaves no one at fault.