State Financial Responsibility Laws

Financial responsibility laws are state laws that require businesses and individuals to prove that they have enough money—or other assets—to cover any damages they may cause from an accident. One way to comply with the financial responsibility laws is to purchase the minimum state car insurance required.

These state insurance laws protect all drivers on the road. Minimum state car insurance requirements and financial responsibility laws vary by state. You can find the state insurance commissioner's office or local DMV that handles these issues by doing an internet search for insurance regulation in your state.

Understanding the Financial Responsibility Laws

All 50 states have financial responsibility laws. They require people to prove that they have assets in reserve to pay for damages that they could be responsible for in a car accident claim. Most states will accept proof of insurance coverage or a surety bond as proof of meeting their minimum requirements.

Think of the law as requiring you to be financially responsible for your actions when you own a car.

A financial responsibility law does not always require you to prove that you have car insurance. However, having minimum insurance for your car is the easiest way to comply with the financial responsibility law and protects you the most.

Financial Responsibility Law and Insurance

With insurance, when you have a claim or cause damage, the insurance company pays for most of the damages and defense. If you take on the financial responsibility yourself, you will pay a lot more than just insurance costs. That's why minimum insurance makes it the easiest and smartest way for individuals to comply with the law.

Proving You Have Coverage

Most—but not all—states require drivers to purchase car insurance, but they do not all have financial responsibility laws. These laws are in place to protect all drivers by requiring them to prove that they are financially able to pay the costs of an accident. Most drivers comply with financial responsibility laws by purchasing car insurance.

You may be asked to show that you comply with the state's requirements:

• After you have been involved in a car accident
• When reinstating your driver's license after it has been suspended or revoked
• When a police officer asks to see it
• When you register your car

Every state is a bit unique. In some states, you can comply with your state's financial responsibility laws in other ways than buying car insurance. Your proof can be in the form of an automobile insurance ID card or a binder of car insurance. The binder is the temporary evidence that an insurance provider will give you as you await the underwriting of your full policy.

Another way to meet the requirement is through a surety bond, which is a guarantee that you can assume responsibility—it functions in the same way as an auto insurance policy.

You may also be able to use proof of a cash deposit to show that you have deposited the minimum amount of funds required with an approved state agency, such as the state comptroller's office or the state's office of insurance.

Some large companies or individuals who own a fleet of cars may use a certificate of self-insurance. Again, you will need to deposit a substantial sum with an approved state agency to receive a certificate.

In almost every case, purchasing car insurance is the best way to comply with financial responsibility laws. Car insurance not only provides financial protection for you when you are in an accident but will also provide for legal defense if the situation calls for it.

Examples of the Law in 2 States

The financial responsibility laws vary greatly in each state. For example, in Arizona, you can put up a $40,000 bond to prove you can pay for damages resulting from an accident, or you can buy the minimum car insurance for Arizona, which is:

• $25,000 bodily injury liability per person
• $50,000 bodily injury liability per accident
• $25,000 property damage liability per accident

In Virginia, the law is very different. You can purchase car insurance or "pay a fee of $500 at the time of registration. Payment of this fee allows a motor vehicle owner to operate an uninsured motor vehicle." While they may operate a vehicle, they are still financially responsible to cover any damages they cause.

The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to them. For current tax or legal advice, please consult with an accountant or an attorney.