At least nine statesAlabama, Iowa, Mississippi, Nebraska, New Hampshire, Tennessee, Virginia, Washington, and Wisconsindo 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 every person who registers a motor vehicle in a given state prove or certify that he or she carries liability insurance equal to at least the state minimum requirements. The enforcement of these laws can be handled in six different ways. Some states use only one method of enforcement; others use a combination.

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

2. Proof of insurance: Some states require proof of insurance when registering a car: Connecticut, Delaware, Illinois, Indiana, Massachusetts, New York, North Carolina, 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: Alaska, California, Florida, Idaho, Illinois, Kentucky, Louisiana, Maine, Minnesota, Missouri, Montana, Ohio, South Dakota, Texas, and Wyoming.

5. Cancellation of insurance policy: Some states require insurers to report auto policy cancellations to the department of motor vehicles. States that require such reports include: Delaware, Georgia, Hawaii, 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: Arizona, Illinois, and Nevada.

Unsatisfied Judgments

Several states 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 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. There are unsatisfied judgment funds in several states but their continued existence is always subject to the political currents and financial conditions that arise in those states.

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, note that, since this fund is an entity created by state law, any recovery may be limited by law to the amount required by the individual states financial responsibility limits and the fund is not considered the insurer of the driver responsible for the accident.

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 personal auto policy does have a separate clause entitled “financial responsibility” wherein it is noted 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.