Financial Responsibility Laws

Compulsory Insurance Laws

Unsatisfied Judgments

Judgments and the Laws

Insurance Policies and the Laws

Introduction

While statutes vary considerably among states, the purpose of all financial responsibility laws is to require owners and operators of automobiles to maintain a degree of solvency to compensate those they may injure by motor vehicles. If people cannot meet these minimum financial requirements, they lose their driving privileges. While there are several ways in which a person may establish solvency (such as a bond or a deposit in a financial institution), proof of automobile insurance automatically operates as a solution. In other words, none of the other requirements needs to be proved when the person shows proof of an automobile policy for bodily injury and property damage liability that meets the limits required by statute.

 In general, the basic elements of financial responsibility laws—in various combinations—relate to accidents, to convictions for certain offenses, and to judgments arising out of use of an automobile. The manner in which the financial responsibility law of a given state, territory, or province deals with one or more of these elements is the basis of this discussion. Because there are as many variations as there are laws, this article discuss in a general way the operation and objectives of these statutes—space does not permit a discussion of the specifics of each law.

 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—insurance, bond, deposit with the bureau of motor vehicles, and the like—was also spelled out in the law.

 However, since the advent and adoption of compulsory insurance laws in forty-eight 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.

 The remaining states—New Hampshire and Virginia—do not require insurance at all. If Virginia drivers opt out of the insurance system, they must pay an uninsured motorist fee, and New Hampshire requires drivers to prove that they are able to pay for damages in case of an at-fault accident. If a New Hampshire driver opts out of the insurance system, he must post a bond or cash to cover the amount of damages caused in the accident.

 Compulsory Insurance Laws

 Compulsory insurance laws require that every person who registers a motor vehicle in a given state 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 six different ways. Most states use a combination of these methods to ensure that their driving citizens are insured.

 1.Self-certification: when applying for new or renewal license plates, the driver must sign a sworn statement that he has liability insurance in force and will not operate a motor vehicle in the state without such insurance. States using this method include Alaska, Connecticut, Florida, Hawaii, Idaho, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, and Virginia .

 2.Proof of insurance: most states require proof of insurance when registering a car, or when reinstating a drivers license after it has been suspended or revoked. Alabama, Arkansas, Colorado, Delaware, Georgia, Illinois, Indiana, Kansas, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nebraska, New York, South Carolina, Texas, West Virginia, and Wyoming.

 3.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 in Vermont.

 4.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. States using this method are Alabama, Alaska, Arkansas, Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Iowa, Illinois, Indiana, Kentucky, Louisiana, Maine, Michigan, Minnesota, Missouri, Montana, Nevada, Ohio, South Dakota, Texas, Utah, and Wyoming.

 5.Cancellation of insurance policy: dome states require insurers to report auto policy cancellations to the department of motor vehicles. States that require such reports include Colorado, Delaware, Georgia, Hawaii, Maryland, New Mexico, New York, North Carolina, Oklahoma, and South Carolina.

 6.Random verification by state: Some states' laws require the state to randomly check a given percentage of registrations for proof of financial responsibility: California, Illinois, Nevada, Ohio, and Utah.

 A driver who is found to be unable to provide proof of insurance, or financial responsibility in the case of New Hampshire, will be subject to fines and penalties, depending on the state where the infraction occurred.

 Unsatisfied Claim and Judgment Fund

 Some states, such as New Jersey, have established a fund out of which benefits are paid to the victim of an accident involving a driver not meeting the financial responsibility requirements or an unknown motor vehicle (the victim for one reason or another does not have access to uninsured motorists coverages and recoveries). These funds are called unsatisfied claim and judgment funds, and are created with contributions from motor vehicle registrants, insurance companies, or both. When an accident occurs and the negligent party cannot pay the damages, the injured person may seek recovery from the unsatisfied judgment fund. The continued existence of the fund is always subject to the political currents and financial conditions that arise in the states that provide them.

 Generally, the rules for the submission of a claim under this unsatisfied judgment fund are similar to the requirements for asserting a claim under standard uninsured motorists coverage. However, since this fund is an entity created by state law, any recovery may be limited by law to the amount required by the individual state's financial responsibility limits and the fund is not considered the insurer of the driver responsible for the accident. When a victim is compensated by the fund, the negligent driver (if found) is responsible for paying back the funds or risk losing his license, so the legal liability of the responsible driver remains in place.

 Judgments and the Laws

 Under these financial responsibility and compulsory insurance laws, treatment of judgments arising out of auto accidents differs from treatment of accidents. The person against whom a judgment is returned may have to not only pay it before license and registration are restored, but may also have to supply proof of financial responsibility as to future accidents. What is more, this treatment could apply to judgments in any state, not merely to judgments where the debtor is licensed. Judgments are deemed satisfied, regardless of amounts involved, when amounts equivalent to required liability limits per person and per accident have been paid.

 There are, as implied, exceptions to the rule that judgments must be paid before reinstatement of driving and registration privileges, but proof of financial responsibility for the future, where required, is not waived. In some states, if the person to whom the judgment is payable consents, driving privileges may be restored, but proof must be given as a prerequisite to restoration.

 Insurance Policies and the Laws

 The failure of an insurer to pay the damages caused by its insured does not mean suspension of the license to drive. In fact, insurance policies do not serve as anything more than samples through which a driver can prove his required financial responsibility; whether the insurance policy applies to the accident and subsequent claim is not relevant in this case. All that matters is that the driver has a policy with limits of liability equal to or greater than the state-mandated minimum limits.

 Auto insurance coverage forms do take note of financial responsibility laws. Both the personal auto policy (PAP) and the business auto coverage form (BAP) state that the policies' declared limits will increase automatically to provide higher limits if such limits are required by compulsory or financial responsibility laws of the particular jurisdiction where the covered auto is being used. Furthermore, both the BAP and the PAP will provide at least the minimum amounts and types of coverages that are required by law whenever a covered auto is used outside the state in which the auto is principally garaged. The PAP does have a separate clause titled “financial responsibility,” which 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.