A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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Reviewed by Leslie Kasperowicz
Farmers Insurance CSR 4 Years

UPDATED: Oct 18, 2021

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Here's what you need to know...

  • Every state sets and regulates its own auto insurance laws and requirements
  • Some states have compulsory insurance laws which require every driver to carry insurance
  • In states with mandatory insurance laws, the vehicle owner must carry a minimum amount of liability coverage to pay for third-party injuries and damages
  • Some states have financial responsibility laws that allow vehicle owners multiple ways to prove they can financially pay for third-party damages
  • Failure to comply with state minimum laws can result in severe penalties ranging from citations and fees to vehicle impoundment or jail time

Start comparing car insurance rates now by using our FREE tool above! You take on several different responsibilities when you own a car. For example, you’re responsible for paying your car payment, you’re responsible for maintaining the vehicle, and you’re responsible for paying for any damages that you cause while you’re operating that vehicle. This is why it’s essential to look beyond the sales price at the actual cost of ownership whenever you’re buying a car.

While some drivers have the resources to pay out-of-pocket damages, a majority don’t have the financial capacity to self-insure. This is why most state officials require drivers to purchase auto insurance to cover damages that they could potentially cause in the future. If you’re interested in learning about these requirements, read this guide and find out what you need to know about car insurance regulations.

Why do car insurance requirements vary by state?

Not only do the car insurance rates vary by state, so do the car insurance requirements. So it’s pretty perplexing to drivers who move from one state to the next to discover they must buy a different level of protection. This is because personal auto insurance requirements are set at a state level rather than a federal level.

There’s currently no Federal law that mandates that all drivers must buy car insurance. Still, nearly every state in the nation has taken steps to enact some form of compulsory auto insurance law. These steps were taken so that at-fault drivers wouldn’t default on paying for damages they created because of negligence behind the wheel.

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How can states require you to buy auto insurance?

Many drivers wonder how the state can require you to buy one type of insurance product and not another kind. After all, states that require their drivers to carry liability coverage while driving a car don’t require the same resident to buy disability, health, or even life insurance.

The primary reason auto insurance is required is that the insurance requirement protects the other party and not the person carrying the insurance.

While the policy directly protects third parties who sustain damages, it indirectly protects the policyholder by paying settlements, judgments, and court fees.

What type of insurance is required by the state?

Requirements and limits may vary by state, but the actual types of coverage you must carry in most states are similar. For example, if you live in a state that operates under a fault-based or tort law system, you must carry protection that will pay for the damages you cause if you’re the party who’s at fault for a collision. Here are the standard coverages you’ll be required to purchase on a basic policy in tort law states:

  • Bodily Injury (BI):

Pays when you cause an accident and another party is injured or killed. This coverage pays on a per person and a per accident basis, up to the limits you’re carrying.

  • Property Damage (PD):

Pays when you cause an accident and you damage someone else’s property. State law dictates the limit you must carry per accident, but you can elect higher limits.

Requirements in No-fault States

Not all states operate under a fault-based system. Instead of operating under a fault system to determine which insurer will pay for the damages, 12 states have a no-fault system. In no-fault states, vehicle owners must carry no-fault insurance that pays for their own damages. This is believed to reduce the number of claims that go to civil courts and clog up the judicial system since people can only sue for pain and suffering if specific conditions are met. Here’s how the coverage requirements look:

  • Personal Injury Protection (PIP):

PIP will pay for your medical expenses, medical transport, lost wages, rehabilitation, and more, depending on the state requirements. Some states have a limit, and others have an open limit where all reasonable expenses are covered.

  • Property Damage (PD):

Property Damage Liability is still required in no-fault states because fault will be used to determine who is responsible for paying for damages to real property. Some states will also require Bodily Injury to pay for losses with out-of-state drivers or while the insured crosses state lines.

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Other Requirements to Look For

While liability is the most common requirement, more and more states require drivers to carry protection for themselves against uninsured motorists. Uninsured Motorist Protection helps the injured policy pay for their medical expenses when someone hits them. They don’t have any liability insurance, or their limits are too low. Some states only require carriers to offer the coverage and give drivers the option to reject it if they desire.

What’s the difference between compulsory laws and financial responsibility laws?

It might seem straightforward, but states with tort laws have very different types of laws. Some states have made insurance a mandatory requirement for each and every person who has a registered vehicle. These are called compulsory insurance laws. Other states, however, have financial responsibility laws, which give the registered owner different options to prove they can pay for damages. While every state is different, some options include:

  • Surety bond
  • Cash deposit with the state treasurer
  • Real estate bond
  • Liability insurance

Penalties for Failing to Comply with Insurance Laws

If you’re tempted to skip the expense in a state with mandatory insurance laws, know that coverage can be verified electronically. If you’re caught without insurance, you face the following penalties:

  • Suspension of license or registration
  • Fines and fees
  • Misdemeanor citations
  • Vehicle storage fees and impound
  • SR-22 requirement
  • Up to 12 months in jail
  • Insurance premium surcharges

Driving without insurance comes with several risks. Not only could you get in legal trouble, but you could also get in financial trouble if you have a loss. If you don’t have insurance, it’s time for you to get premium quotes. Use an online tool, and you can compare premiums for basic coverage or for more comprehensive policies that provide more broad protection. Compare car insurance rates now by entering your zip code in our FREE tool below!