Car Insurance and Financial Responsibility, Part 1

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Auto Insurance Financial ResponsibilityEvery state in the union requires demonstrating financial responsibility before you can drive a car on public roads and highways. Financial responsibility means being able to cover the property damages or injury to another party if you’re in an accident, and you’re at fault. Depending on the state, there are a variety of ways to demonstrate financial responsibility.

The primary way that drivers can make sure that they’re covered in the case of an accident is to buy an auto insurance policy, and keep the insurance card in the glove compartment at all times. Most states require that in the event of a traffic stop, the motorist has to be able to produce proof of insurance (or financial responsibility), along with vehicle registration and driver’s license, to any law enforcement officer requesting the information.

Some states allow other methods of demonstrating financial responsibility. For example, motor vehicle laws in the State of Arizona allow drivers not wishing to carry basic liability insurance to deposit cash, a certificate of deposit, or bond in the amount of $40,000 with the state treasurer. A certificate of financial responsibility will be issued in lieu of an insurance card. Other states have similar statutes on the books allowing for either self-insurance, or for a driver to demonstrate that they have the financial resources to cover another party’s losses in an accident.

When it comes to car insurance, perhaps the most important aspect of carrying at least minimum coverage liability insurance is the ability to protect yourself (and your family) financially. If you’re not insured, and you’re involved in an accident for which you’re found at fault, you can be sued and judgments can be rendered that will affect your finances and credit rating for many years.

In recent years, due to rising auto insurance costs and a difficult economy, the number of uninsured drivers has been increasing in almost every state. In response, many states have tightened insurance regulations, and have increased fines and penalties associated with driving without insurance (or being able to demonstrate financial responsibility).

Additionally, recognizing that many consumers are having trouble making financial ends meet due to loss of a job or decreased hours at work, some states, such as New Jersey and California, are starting to offer low cost car insurance programs that provide basic coverage for motorists at a lower rate. This basic coverage is rarely enough to compensate another party for injury or vehicle / property damage, but it’s certainly better than driving totally uninsured.

Part 2 of this series will discuss assigned risk pools in the auto insurance residual market, and options if you can’t afford even cheap car insurance in the voluntary market.