Jessica Sautter is a Content Writer for CarInsuranceCompanies.com with a Bachelor’s Degree from Eastern Michigan University in Elementary Education with a Major in Reading and a Minor in Mathematics.

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Chris Harrigan has an economic degree from Limestone College and an MBA from Clemson University. He previously managed auto insurance claims for Enterprise Rent-A-Car. Currently, he is using his business and insurance expertise to provide insurance data analysis and visualizations to enhance the user experience.

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Reviewed by Chris Harrigan
Former Auto Insurance Claims Manager

UPDATED: Nov 7, 2020

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Here's what you need to know...

  • Auto insurance is a financial product that provides you with benefits that will pay for the damages that can arise after a car accident
  • Liability coverage is typically required under state law for all cars that are registered to be driven for personal use
  • Without auto insurance, vehicle owners would be responsible for paying for third-party damages, their own medical bills, and their own vehicle repairs without any help from an insurer
  • In addition to paying for third-party damages, your policy will also pay for your legal defense and for court costs if you’re taken to court after an at-fault accident
  • Having an insurer by your side protects you when a claim is being investigated because your claims adjuster represents you and communicates with the other party’s insurer for you

Car insurance is mandatory in most states. Since it’s mandatory, most people automatically buy coverage when they buy a car without thinking about how important the protection is.

Often it’s not until you need to file a claim that you start to look through your coverage and your policy provisions to learn how your policy works.

If you’re the type of consumer who likes to prepare for catastrophes before they happen, you should review your policy and the protection it affords so that you can see why you need the policy.

There’s more to buying insurance than just selecting state minimum limits and complying with the law. Here is why auto insurance became mandatory in the first place.

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Why do states require vehicle owners to carry auto insurance?

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States don’t require homeowner’s to buy home insurance or renter’s to buy renter’s insurance. There are very few forms of insurance that are actually required under state law, but when you own a car it’s your duty as a vehicle owner to buy insurance on it.

Insurance laws aren’t set at a federal level; they are set at a state level, which means that requirements will vary from state to state.

One of the main purposes of auto insurance requirements is to ensure that people can pay for the damages that third-parties sustain when they are to blame for a car crash.

Since most states have their own tort laws that say that the at-fault party must help restore victims in an accident to their pre-loss condition, requiring auto insurance makes a lot of sense.

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How does auto insurance work?

Insurance isn’t a bank account. Insurance is a product that offers financial protection so that you don’t have to tap into your bank account.

While some see car insurance as a financial vehicle that they deposit money into so that they can withdraw the money when they need it, this couldn’t be further from the truth.

Instead of looking at the product like this, you need to consider insurance as a pooled resource that people pay into to spread out risk.

An insurance company will minimize risk by charging every client premiums. This money will be placed in a pool and the funds in this pool are used to cover claims presented by the clients.

What does a basic auto insurance policy protect you against?

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Even a policy with bare minimum coverage limits will provide you with some protection. Most vehicle owners are required by law to carry a minimum amount of liability coverage.

This coverage pays for third-party damages that you are primarily responsible for. By definition, you are primarily at fault for an accident when you’re 51 percent or more at fault for the crash.

If you carry only what the state requires, you will have at least some asset protection and some income protection if you’re sued.

While state minimum coverage isn’t recommended, having some coverage is better than none at all. Here is what a basic policy will pay for when a claim is filed:

Bodily Injury Liability

Pays for medical bills, funeral expenses, and lost income when you injure someone in an accident. Bodily Injury only pays for third-party injuries and not the injuries sustained by passengers in your vehicle.

Limits are set on a per person and a per accident basis.

Property Damage Liability

Pays for repair bills or the total replacement of someone else’s tangible property when it’s damaged in a collision that you’re negligent for.

Your insurer will only pay for reasonable repair costs up to the property’s fair market value. The limit that you carry is on a per-occurrence basis even if there are multiple vehicles involved.

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Legal Defense and Court Costs

Insurance companies have a duty to defend their insureds when they are facing a liability coverage dispute.

Since it can get expensive to defend yourself in court, it’s nice to know that insurance companies have a duty to hire legal counsel and to defend the insured against unfounded claims in a covered lawsuit.

The legal fees and court costs that accrue when a covered third-party claim is filed are covered in addition to the liability limits, which is why companies have huge legal teams.

If a judgment is awarded, the monetary award will be taken from the insured’s liability limits. If you didn’t have insurance, you would have to hire a lawyer and pay the fees on your own.

Additional Supplemental Payments

Legal fees are considered a supplemental payment under the contract. There are also other supplemental payments that many customers who are well-versed in insurance don’t even know about.

These payments can help you get back on your feet after an at-fault accident. Here are the basic supplemental payments offered under a standard policy:

  • Expenses incurred by the insurer when investigating a claim
  • Bail bonds that are required after an accident or violation issued when a bodily injury claim occurred
  • Loss of earnings if the insured must take time off of work to appear in court
  • Prejudgment interest that compensates the plaintiff for damages that are awarded by the court

What is at risk if you don’t have liability auto insurance?

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If you choose to drive an uninsured vehicle that’s registered in your name, you could suffer some major setbacks if you have a loss. Not only will be penalized by the state for violating the law, a single accident could lead to financial devastation.

Here are some of the consequences for driving without insurance:

  • Fines for citations
  • Vehicle impound
  • Loss of registration or driver’s license
  • Fees to reinstate license or registration
  • Mandatory community service
  • Jail time
  • Higher auto insurance costs in the future
  • Loss of your job
  • Loss of some auto insurance discounts for having a lapse in coverage
  • Court costs if you have an accident and don’t have an insurance company to defend you
  • Wage garnishments to pay for judgments awarded in court

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Protecting Your Financial Future

Carrying bare minimum limits will help you satisfy legal requirements, but they don’t protect you when you suffer losses of your own.

If you want coverage that will help you pay your own bills, it’s important to consider raising your limits and expanding the coverage options that are in your insurance portfolio.

Additional first-party coverage isn’t required by law, but it might be covered by a lender or lessor. You should check your finance contract and then review options before you reject personal insurance coverage. Here are some options:

  • Comprehensive
  • Collision
  • Medical Payments
  • Uninsured Motorist Protection
  • GAP
  • Rental Car
  • Towing
  • Roadside Assistance

Driving without insurance is a very risky choice. You might not see the point in carrying insurance, but if you ever need to file a claim you will appreciate having it.

Be sure to price the cost of various policies when you are shopping around for cheap rates. Use our FREE online rate comparison tool and you can get instant quotes in a matter of minutes. Enter your zip code below to get started!