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 Leslie Kasperowicz

UPDATED: Mar 3, 2022

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Here's what you need to know...

  • The McCarran-Ferguson Act passed in 1945 stipulated that the state should regulate insurance industries and laws in the interest of the public
  • State officials set mandatory car insurance requirements and are responsible for updating rules and legislation when necessary
  • The state also regulates the auto insurance companies that do business in the state and the policies that are sold to ensure they’re doing good business, agents are licensed and the companies are financially stable
  • Some states have financial responsibility laws and others have mandatory auto insurance laws where there’s no option but to buy coverage
  • Massachusetts was the first state to require insurance in 1925 and New Hampshire is the only state left where drivers can legally choose to drive uninsured

Auto insurance wasn’t always required. In fact, in some states vehicle owners still have an option as to how they’ll pay for damages they could potentially cause behind the wheel. Even so, a majority of states have set their own state-specific car insurance requirements to protect all vehicle occupants, all bikers, and all pedestrians who are driving, riding or walking down public streets. Start comparing car insurance rates now by using our FREE tool above!

Auto insurance didn’t just become mandatory overnight when the car was invented. It was a process that was jump started by the growing popularity of motorized vehicles in the United States.

Auto insurance has been required in 48 out of 50 states, and Massachusetts became the first state to sign the law in 1927.

If you’d like to learn about the history of personal car insurance and how it came to be mandatory in most states, read this guide and learn the requirements and when legislation was passed.

What led to the need for car insurance?

Car insurance seems like a form of financial protection that’s been around forever, but that’s not the case. When steam-powered cars were first invented in 1887 and the government noticed a need to pave roads, officials also noticed the need to address liability and who’s responsible for paying damages that they cause as they’re driving a vehicle.

Since insurance was a product that had already been developed to protect products being shipped overseas, officials decided this was the most reasonable way to help drivers protect themselves from financial loss.

By 1903, more than 4000 vehicles were being produced each year by manufacturers like Henry Ford. This is why auto fire and theft insurance was first developed in 1902. It wasn’t until 1912 that auto liability coverage was offered to protect third parties.

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Who is responsible for setting auto insurance laws?

Insurance regulation was a very complicated issue when the United States was young. This is because the Federal government felt like products sold over state lines were under the jurisdiction of the government. After the ruling by the Supreme Court in the Paul v. Virginia case, it was found that selling insurance wasn’t actually interstate commerce. This ruling made it so that states had the right to regulate insurance.

Regulation switched hands a few times, but it was in 1945 that the McCarran-Ferguson Act was passed saying that it was best for the public for states to regulate their own insurance industries. Still, this ruling didn’t officially make insurance mandatory.

How do states regulate the insurance industry?

It’s interesting to know that the state regulates in three different ways. They set legislation, they regulate companies, and they review court rulings. The purpose is to ensure that all companies offer fair rates and that consumers are protected. State regulators also keep the market competitive and maintain insurer solvency. Some of the statutes that State Departments of Insurance regulate to achieve these goals include:

  • sales and claims procedures
  • insurance rates
  • the formation of insurance companies
  • policy forms offered
  • licensing of agents and brokers
  • insurance agent ethics
  • taxation of premiums and companies
  • financial requirements to prevent bankruptcy
  • audits and solvency testing

Where were the first auto insurance policies offered?

It might be surprising to learn that insurance gradually became available across the country. While the first policies had their flaws, the first state to offer drivers the option to buy liability insurance was Connecticut. This was offered in 1925 to help drivers involved in accidents when Connecticut had already passed a law where drivers were required to prove they were financially responsible after an auto accident had already occurred.

Connecticut required drivers to show financial responsibility in the event of an accident resulting in bodily injuries, death and property damage.  The auto insurance law was one of the most effective ways to protect drivers from license suspension and act appropriately in the event of an accident resulting in serious consequences.

This is why most insurers have headquarters located in CT. According to Connecticut law, drivers could meet their financial responsibility by purchasing liability insurance, providing a bond, depositing bonds, stocks, or other financial instruments or depositing currency. If the driver didn’t provide any of these requirements, his license was suspended.

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What was Connecticut state law in 1925?

Auto insurance wasn’t mandatory at the time, but it was an option so that driver licenses weren’t suspended. It’s important that you know there was no reporting mandatory requirement at the time. If someone didn’t report their accident, no one knew. Here’s how early Connecticut law allowed you to demonstrate financial responsibility:

  • Provide a bond of $10,000
  • Deposit bonds or other forms of collateral with the treasurer worth $10,000
  • Deposit $10,000 cash
  • Purchase liability with a minimum level of $10,000 of coverage

Where was auto insurance first made mandatory?

Connecticut may have set the stage for auto liability insurance, but Massachusetts got the ball rolling when it comes to making it mandatory when the auto insurance requirement law was passed in 1927. It was passed as part of the driver licensing law in the state. It wasn’t until years later that other states began to pass their own compulsory auto insurance laws. Some states passed similar mandatory auto insurance law and others chose to pass more lenient pieces of legislation.

What is the difference between financial responsibility law and compulsory insurance law?

Auto insurance became truly mandatory in most states around 1965 when states like New York and North Carolina joined the list of unions where laws were passed. The reason why insurance laws in each state can be confusing is because there are different kinds of laws that have been passed. Some states lean towards financial responsibility laws and others have passed more strict mandatory or compulsory auto insurance laws with uninsured driver penalties. Here’s how each works:

  • Financial Responsibility: Allows drivers to prove they can cover damages with cash, bonds, collateral or insurance
  • Compulsory Insurance: Requires all vehicle owners to carry minimum liability coverage on their vehicle. If owners don’t comply, they face uninsured driver penalties.

The only state that currently has no auto insurance requirements is New Hampshire.

If you live in any other state, you’ll need to look into protection to obey the law. Be sure to price the cost of coverage before buying an insurance policy. Now you know more about when and how auto insurance become mandatory in the United States. Auto insurance is the simplest way to prove financial responsibility in almost all states.

If you’d like to price shop for mandatory auto insurance coverage options or higher limits, use an online rate comparison tool and you can find the best rates for the best amount of auto protection.

Start comparing car insurance rates now by entering your zip code in our FREE tool below!