Why is auto insurance necessary?

Mandatory auto insurance laws

Support for compulsory insurance laws stems from the belief that such laws increase the number of financially responsible drivers. Many state legislators say that, because of constituent pressure, it is politically difficult for them not to support compulsory auto insurance laws.

These laws often require that drivers present proof of insurance before they are allowed to register their vehicles and make it illegal to drive without proof of current insurance. The seriousness of the crime and penalty for driving without proof of insurance vary among the states, with possible punishment ranging from a fine to a jail sentence. Some states, like Missouri, require motorists to present documentary proof of insurance to register their cars, but the majority require only that people sign affidavits attesting that they have, and will maintain,
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In contrast to compulsory insurance laws, financial responsibility laws, in force in the majority of states, do not make it illegal to operate a vehicle without insurance or the financial equivalent (usually in the form of posting a bond to cover damages) until after an accident occurs.

Even the best and best-enforced compulsory insurance laws, however, offer no protection from operators of stolen vehicles, drivers from other states, drivers of unregistered vehicles, hit-and-run drivers, drivers whose insurance limits are too low to pay for all the damage they have caused, or insurance dodgers who cancel their policies soon after they receive proof-of-insurance certificates and register their vehicles. Therefore, even in states with compulsory insurance laws, motorists need uninsured and under-insured motorist insurance to protect themselves from losses caused by these drivers.

In the mid 1950s New York was the first state to enact a statute requiring insurers to offer uninsured motorist (UM) coverage. Virtually every state now requires auto insurers to offer this coverage, and in 29 states and the District of Columbia drivers must purchase it.

Most state laws mandate a minimum basic UM coverage be offered at limits equal to the automobile bodily injury coverage required under the state’s financial responsibility law for liability. The concept is that the policyholder is provided with the minimum protection required by law irrespective of whether the at-fault driver has insurance. Because such limits were often unrealistically low (that is, insufficient to cover actual accident costs), insurers began making available higher limits of UM coverage, usually in amounts up to the third-party liability coverage chosen by the insurance buyer. The theory was that policyholders should have access to the same level of protection for themselves as they were providing to others.

As insurers offered higher limits of UM coverage, an anomalous situation developed. A policyholder carrying higher limit UM might be in a more advantageous position after being injured by an uninsured motorist than after being injured by a financially responsible motorist carrying lower limits of bodily injury liability insurance. Therefore, the next step in the progression was development of coverage designed to fill the gap between the limits available to the victim of the inadequately insured motorist with the desired degree of
protection.

This form of insurance is known as under-insured motorist coverage (UIM). Thirty-two states have laws or regulations requiring insurers to offer this type of coverage, and insurers offer it voluntarily in most other states.