8.8 Financial Responsibility & Compulsory Insurance Laws Copy

All states have laws that assure compensation for auto accident victims. The five types of statutes in effect presently are:

• Financial responsibility laws;
• Compulsory automobile liability insurance:
• Unsatisfied judgment fund laws;
• Laws requiring uninsured motorists coverage; and
• No-fault automobile laws.

While statutes vary considerably among states, all financial responsibility laws have the same purpose: to require owners and operators of automobiles to maintain a degree of solvency to compensate those they may injure by motor vehicles. In theory, if people cannot meet these minimum financial requirements, they lose their driving privileges.

There are several ways in which a person may establish solvency: a bond, a deposit in a financial institution, or proof of automobile insurance. If a person proves he has auto insurance, he does not have to bother with the other requirements.

Financial Responsibility Laws

Traditionally, the term financial responsibility law referred to the statute that prescribed the minimum amounts for which a driver in a particular state was liable. How a driver met those requirements, either insurance, bond, deposit with the bureau of motor vehicles, etc.-was also spelled out in the law. However, since the advent of compulsory insurance laws in 41 states and the District of Columbia, the term financial responsibility law has taken on a new connotation. It now refers to a statute that does not require proof of insurance or other responsibility until after a driver is involved in his first accident; or until conviction of certain offenses, such as driving under the influence.

At least nine states – Alabama, Iowa, Mississippi, Nebraska, New Hampshire, Tennessee, Virginia, Washington, and Wisconsin – do not require insurance or other proof of financial responsibility until after the first accident or serious violation. 

Compulsory Insurance Laws

Compulsory insurance laws require that when registering a car, every person must prove or certify that he carries liability insurance equal to at least the state minimum requirements. The enforcement of these laws can be handled in several different ways.

Some states use only one method of enforcement; others use a combination.

Proof of Insurance:

• Requires proof of insurance when registering a car
• At time of motor vehicle inspection

Some states require an annual safety inspection of all vehicles registered. Proof of insurance is one of the requirements for obtaining a new inspection sticker.

• Verification by the police:

Often, motorists will have to prove to a policeman at the time of an accident or ticket that they have insurance.

Insurance Policies and the Laws

Auto insurance coverage forms do take note of financial responsibility laws. The personal auto policy (PAP) automatically provides higher limits, if such limits are required by compulsory or financial responsibility laws of the particular jurisdiction where an accident occurs. The personal auto policy does have a separate clause entitled “financial responsibility.”

That clause notes that “when this policy is certified as future proof of financial responsibility, this policy shall comply with the law to the extent required.” This clause simply reinforces the point that insurance policies are always subject to the laws of the state(s) in which the policies are in force.

Required Limits by State or Province

Each state (or Canadian province) sets different minimum liability limits to be carried.

Texas laws express the requirement in terms of split limits of $30,000/60,000/25,000- ($30/60/25).

Texas Department of Insurance

For more information regarding the Texas Personal Auto Policy explore this link:
http://www.tdi.state.us/auto/index.html

Misrepresentation of Insurance Policy

Misrepresentation– The statement made by a party to a contract, that a thing relating to it is in fact in a particular way, when he knows it is not so. (as legally defined)

Misrepresenting an insurance policy can be defined as

• Making an untrue statement of material fact;
• Failing to state a material fact that is necessary to make other statements made not misleading, considering the circumstances under which the statements were made;
• Making a statement in such manner as to mislead a reasonably prudent person to a false conclusion of a material fact;
• Making a material misstatement of law; or
• Failing to disclose any matter required by law to be disclosed, including a failure to make disclosure in accordance with another provision of this code.