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Financial Responsibility and Auto Insurance

There are many purposes for auto insurance coverage. From the perspective of the governments of the states requiring auto insurance, one of the primary purposes is to guarantee the financial responsibility of drivers out on the roads. As it pertains specifically to auto insurance and to driving in general, financial responsibility is simply a driver's ability to pay for any damages that may result from an auto accident. Many states have specific provisions dealing with financial responsibility built in to the language of their auto insurance laws and vehicle codes. There are different ways for drivers to demonstrate financial responsibility as auto owners, and many different ways in which this issue can be an important one in accident and claim situations.

Liability Auto Insurance Guarantees Responsibility

For drivers all throughout the country, auto liability coverage is usually the simplest and most common way to demonstrate financial responsibility in light of state requirements for drivers to do so. Liability coverage is required in some form in virtually every state in the country, and it is available to drivers in every single state. A basic auto liability policy puts a driver out on the road with legal means of protection and demonstrates to the driver's home state that he or she is prepared to deal with potential financial liability circumstances that could follow an at-fault accident.

The issue of fault and its relation to auto coverage is itself a whole separate topic worthy of its own extended discussion. For our purposes, it is necessary only to assume that auto liability insurance protects you as a driver when you are at fault in an accident from the direct financial responsibility of dealing with the expenses incurred by the other parties involved in the collision. Auto liability insurance guarantees your financial responsibility in such cases, up to the limits of coverage stated in the language of your policy.

Each state has its own specific requirements for liability coverage. Many states simply require a liability policy with bodily injury and property damage components. Others have different requirements, such as those which require the driver to carry personal injury protection (PIP) coverage, which protects the covered driver and certain passengers in the covered vehicle itself. However, auto liability insurance is only set aside to deal with the expenses associated with treating injuries and repairing or replacing property borne by the non-liable parties involved in an accident.

As far as financial responsibility is concerned, your task as a driver is to maintain an acceptable level of auto coverage that satisfies every aspect of your state's auto insurance laws and regulations. All such laws have liability concerns built-in because in terms of priorities, most states feel (and most drivers would agree) that taking care of the innocent driver and passengers has to come first.

Common Features of Liability Policies

Across the country, specific standards differ in many ways between the different states and the way their legislative bodies have set up their own standards for auto liability coverage. However, there are a few important characteristics all liability policies have in common. State limits might vary, but all states that require drivers to carry liability coverage set a minimum level of coverage drivers have to carry. As a resident of your home state, you are obligated to carry at least the amount prescribed by your state legislature. Another common feature is the dual emphasis on both bodily injury and property damage liability. These are the two big concerns financially that come out of liability or at-fault auto accidents. As a driver, you need to be protected from both.

In states that have these requirements for auto liability coverage, you cannot go out on the road without carrying a policy fitting all the minimum requirements of the home state. In most cases, you can't get your vehicle registered without this coverage, meaning you can't get a license plate, making you an easy target for law enforcement officials. Usually punitive measures are also built-in as a part of the state insurance law. Failure to carry adequate insurance coverage on your automobile can cost you a stiff fine or a suspension of your license and/or your auto registration.

Alternate Means of Demonstrating Responsibility

As previously stated, most drivers choose to satisfy their home states' automotive financial responsibility requirements by purchasing state-approved auto liability insurance coverage for their vehicles. However, this is not the only option for satisfying these requirements in most states. It is merely the most affordable and realistic option for those of us who are not highly financially solvent and are not capable of coming up with tremendous amounts of cash. Still, there are some who do exhibit that kind of solvency, either as individuals or as larger business units. For these groups, alternate means of proving financial responsibility are often preferable to purchasing auto liability coverage from state car insurance companies.

In terms of strict economic reasons, states require liability coverage for drivers so that in the event of an accident, the costs of dealing with the crash are met by the liable driver. In cases where drivers can demonstrate independent financial responsibility (i.e. the ability to handle these sorts of circumstances out of pocket without the aid of an auto insurance company), they are quite often allowed to forego auto liability insurance in favor of other options.

One example of such an alternate arrangement is a surety bond. In its essence, a surety bond is an express three-party contract. In this sort of arrangement, the surety (or a specified person on the bond) agrees to be responsible financially for any damage caused by a named driver on the bond if that driver is ever involved in an at-fault accident leading to injuries or property loss to other drivers and passengers. Those drivers and passengers are the third party in this type of contract. A surety bond must be approved by the state in which it is issued. To be approved, at minimum such a bond must be of acceptable financial value for the state to grant its approval. The minimum acceptable value of these bonds are specified in the auto insurance code of each state in which they are permissible, just the same as the acceptable levels of liability coverage.

Another option common in quite a few states is some form of bond or cash deposit (sometimes both are options) that a driver can arrange to send to a state's department of motor vehicles. The same basic principle applies here as it does to the idea of the surety bind. It simply reinforces the notion that the bonded driver has the funds to back up their claims of financial responsibility as it pertains to auto liability protection. Other options exist, though these do vary from state to state. For example, some states allow self-insurance options for auto owners with fleets larger than a certain specified number of vehicles.

Auto insurance financial responsibility can be demonstrated in a number of ways in terms of the options drivers have for meeting the requirements of their home states as they pertain to general auto liability coverage. Financial responsibility is a part of our responsibility as drivers.



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