Auto Insurance Basics - Auto Insurance/Financial Responsibility Laws

Automobile insurance is a contract that helps pay for certain types of financial losses or obligations resulting from the use or ownership of an automobile. To obtain an insurance policy, you pay a specified amount of money called a “premium.” In return, the insurance company agrees to pay certain expenses and legal liabilities depending on the terms of the insurance policy.

Financial Responsibility Laws

If you drive an automobile, many states have laws requiring you to be financially responsible for your actions. In other words, drivers must show their ability to pay for damages or injury to others resulting from the ownership or operation of a car.

For example, the minimum statutory requirements in California are:

Property Damage

$5,000 for any one accident.

Bodily Injury

$15,000 for death or injury of any one person, any one accident.
$30,000 for all persons in any one accident.

Again, these figures are the minimum coverage amounts required by law. It is generally a good idea to have substantially more coverage than the minimums.

Many people think that an insurance policy is the only way to comply with financial responsibility laws. This is not true. In California, for example, there actually are four ways to satisfy the financial responsibilty law:

– Coverage under an automobile liability insurance policy;

– A cash deposit of $35,000 with the Department of Motor Vehicles (DMV);

– A certificate of self-insurance issued by DMV to owners of fleets of more than 25 vehicles; or

– A $35,000 surety bond obtained from an insurance company licensed in California.

What happens with my insurance policy if my car is in an accident?

When your car is in an accident for which you are liable, bodily injury (BI) liability covers your liability to others for injuries to them. Property damage (PD) liability covers your liability for damage to someone else’s property.

Therefore, a policy with BI of $15,000/$30,000 and PD of $5,000 will pay out as follows:

– The maximum limit for one person’s injuries, medical expenses is $15,000 under the bodily injury portion;

– If two or more people are injured, the maximum limit for the accident will be $30,000;

– The maximum limit for damage to other people’s property (their car, their fence, etc.) is $5,000.

Comprehensive coverage, uninsured motorist, medical payments and collision insurance are not required by law.

What Could Happen If I Ignore The Financial Responsibility Laws?

All California drivers and owners must have at least the statutory limits of minimum liability insurance or an approved alternative way to pay for injury or property damage they may cause. Penalties are very severe for non-compliance with this requirement.

The most common way drivers comply with the financial responsibility requirement is by purchasing an automobile liability insurance policy. If you have an accident and don’t have insurance, then your license may be suspended. It is your responsibility to provide liability insurance for any vehicle you own regardless of who is operating the vehicle.