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What is proof of financial responsibility?
When you think about financial responsibility, what comes to mind? Are you making a budget, committing to said budget, maybe paying down debt, or growing your credit score? All of these are good things, but when it comes to Financial Responsibility Laws, the definition is a little different.
Financial Responsibility Laws are passed and enforced on a state level that requires individuals and businesses to prove they have enough liquid capital (money) or assets to cover damages from an accident.
What Is The Car Insurance "Financial Responsibility" Law?
Anyone who has had to buy or maintain an automobile can tell you that cars and trucks are expensive. In the United States alone, expenses relating to auto accidents are estimated to exceed $150 billion every year.
While not all states require proof of financial responsibility at the time of vehicle registration, failure to demonstrate the necessary level of financial responsibility when an incident takes place could result in a suspension of your driver’s license, or possibly revocation of your vehicle. The easiest and most common way to have proof of financial responsibility is to have your automobile insured and to keep evidence of that insurance with your car or on you when you drive.
The most common time you will be asked to show that you comply with your state’s financial responsibility relating to your automobile will be when you are involved in a car accident. You can also be asked to show it during routine traffic stops at the request of a police officer, or when you register your car. After your license has been suspended or revoked, you will also need to show your proof of financial responsibility to have your license reinstated.
With car insurance, when you make a claim after an accident or other damages involving your vehicle, your insurance company will usually pay most of the damage costs, and your defense if it goes to court. If, instead of letting insurance handle it, you take on the responsibility yourself, you will end up paying a lot more than just insurance costs. Insurance will not only cover your financial responsibility needs, though; it will also include any legal or medical costs associated with the accident. Some insurance plans will even cover the cost of an attorney for any legal proceedings that result from your auto incident.
State Financial Responsibility Laws
All fifty states in the United States have financial responsibility laws that require people to prove they have assets and cash in reserve to pay for damages when they are responsible for a car accident claim, or that they have an insurance policy.
Not every state will have the same laws, though, so it is essential to familiarize yourself with how the law works in your state of residence, and in the states you drive in frequently. Let’s compare two examples, Arizona and Virginia. In Arizona, a driver may put up a $40,000 bond to prove financial responsibility, or they can buy a minimum car insurance plan, which will cover up to $25,000 in property damage per accident, up to $50,000 in bodily injury per accident, and up to $25,000 in bodily injury per person. In Virginia, meanwhile, a driver can purchase insurance, or pay a one-time fee of $500 at the time of registration, which will allow them to operate the vehicle but also leave them entirely liable to cover any damages they cause while driving.
While the easiest, most common, and probably the best way to comply with Financial Responsibility Laws is to have your vehicle insured, many states have several ways to comply with the laws. In some states, drivers can comply by keeping real estate or surety bonds earmarked to cover the expenses of accidents, or by keeping a cash deposit within your state. Likewise, more substantial corporations and companies can satisfy proof of financial responsibility by self-insuring their vehicles.