Understanding Insurance Coverage Laws

Doug Mann

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Table of Contents
  1. The Philosophy Behind Mandatory Auto Insurance
  2. Types of Legally Required Auto Insurance
  3. States That Don’t Require Auto Insurance
  4. Why the States and Not the Federal Government Require Auto Insurance
  5. Mandatory Auto Insurance Isn’t Going Anywhere

If you’re like most people, you’ve always carried proof of insurance and registration in your glove box without giving it a second thought. Most state legislatures, however, mandate auto insurance coverage—and for good reason. Massachusetts and Connecticut became the first two states to require auto insurance, way back in 1925. 

The primary reason for requiring auto insurance coverage is not to protect injured drivers from their own irresponsibility. The primary reason is the danger that an uninsured driver poses to others. This is the reason why almost every state requires liability insurance, but only some states require their drivers to purchase insurance that protects them against their own injuries.

The Philosophy Behind Mandatory Auto Insurance

Governments require individuals to pay for the damages that they carelessly cause to others, including damages caused by bad driving. Were this not the case, driving a car would be an arbitrary act that few people would risk. The consequences for the economy, not to mention the personal unfairness that would result, could be catastrophic.

Why Insurance is Necessary

A requirement to “pay for the damages you cause”, while fair-sounding, would be next to meaningless without insurance. Car accidents can be very expensive, and most people simply cannot afford to pay car accident damages. It is for this reason that auto insurance companies exist—to allow a driver to pay, not for the financial consequences of an accident, but for the risk of having an accident, regardless of whether one actually occurs. 

In this way, the right of the government to require people to pay for the damages they cause to others translates into the right to require drivers to purchase auto insurance. Good drivers get peace of mind, bad drivers get insurance companies to clean up their messes, insurance companies make a profit, injured parties get compensated, and everyone is happy.

The Difference Between Mandatory Auto Insurance and Mandatory Health Insurance

Why was the “Obamacare” health insurance purchase requirement declared unconstitutional, while states are still free to require drivers to carry auto insurance? The stock answer is that purchasing health insurance protects you, while purchasing auto liability insurance protects other people who you might carelessly injure. Notwithstanding, the use of “no-fault” auto insurance, which is the standard in a dozen states, tends to contradict this reasoning.

Types of Legally Required Auto Insurance

States typically require some or all of the following types of auto insurance:

  • Bodily injury liability insurance: Bodily injury auto liability insurance covers the at-fault driver’s personal injury liability to other people (drivers, passengers. pedestrians, etc.) . Two maximums apply—the maximum coverage per person, and the maximum total coverage for the accident.
    If coverage is $25,000 per person and $50,000 per accident, for example, and three passengers each suffer $25,000 in damages, each one is entitled to $50,000/3=$16,666.67 per person, even though the per-person coverage limit is $25,000.
  • Property damage insurance: Property damage insurance covers damage to the vehicle of the driver who was not at fault. 
  • Personal Injury Protection (PIP) insurance: This type of insurance is only required in the dozen or so states that operate a “no-fault” auto insurance system. It covers your own injury up to policy limits. Beyond that, you must file a third-party claim against the at-fault driver’s bodily injury liability insurance policy.
  • Uninsured motorist coverage: 21 states and the District of Columbia require their drivers to purchase uninsured motorist coverage. This type of auto insurance protects you if the at-fault driver is uninsured. It also applies in the case of a hit-and-run accident.   
  • Underinsured motorist coverage: 14 states require their drivers to purchase underinsured motorist insurance. This type of insurance protects you in case that at-fault driver’s insurance policy limits are too low to pay your claim. This might occur even if the driver carries mandatory minimum insurance. Uninsured motorist insurance does not cover hit-and-run accidents.

If drivers share fault for the accident, who is the “at-fault” driver? In this context, a driver is “at fault” to the degree of their percentage of fault for the accident. A driver can still be partially at fault even if the accident was mostly the other driver’s fault.

Leased vehicles

Automobile leasing companies typically require you to maintain more than the legal minimum level of insurance coverage on their vehicle. This is because they own the vehicle and wish to protect their investment. While state law does not mandate additional coverage, the contract between you and the leasing company will include this requirement. Ultimately, it is the state law that will enforce the lease contract if any insurance coverage dispute arises.

States That Don’t Require Auto Insurance

Auto insurance is, of course, available in every state. Two states, however, allow alternatives to auto insurance—Virginia and New Hampshire. Virginia drivers may pay an uninsured motor vehicle fee of $500 to the state government. This fee does not come with any insurance coverage. In New Hampshire, drivers can post cash bonds. 

In both states, drivers remain liable for damages they cause. Your state of residence is irrelevant to the insurance opt-out. Instead, you must register a vehicle in the state to qualify as an in-state driver. Even then, the opt-out is valid only with respect to the particular vehicle you registered.

Why the States and Not the Federal Government Require Auto Insurance

There is no federal law requiring all drivers to purchase auto insurance. If there were, Virginia and New Hampshire drivers would not be able to opt-out of this requirement. The 1945 McCarran-Ferguson Act delegated the regulation of the insurance industry to the states. The federal government reserves the right to take back this authority at any time. This does not appear likely in the foreseeable future, however.

Mandatory Auto Insurance Isn’t Going Anywhere

Without auto insurance, someone injured by a deadbeat at-fault driver would pay the price in one of two ways. They would pay out of their pocket, or in the form of unrepaired property damage, an untreated injury or loss of their own life. The policy of state governments to go as far as possible to place the burden of an accident upon the one who caused it serves as an incentive to drive carefully, keeping the roads safer for everyone.

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