Auto insurance: why do you need it?

Perhaps you have noticed the dispute over the Affordable Care Act and mandatory healthcare cover. Yet no one disputes the right of states to mandate carrying auto insurance. The reason for the difference is deceptively easy to explain. Whether you fall ill and need to go to hospital is not in your control, but you have a choice whether to use a vehicle on the road. Yet, that does slightly miss the point. The Affordable Care Act does give people a choice. If you refuse to buy a policy, you have to pay a little more tax.

Anyway, no doubt the Supreme Court will decide whether the healthcare mandate is constitutional. This leaves us paying for auto insurance. The justification lies in the idea of financial responsibility. The majority of states use the law of tort to decide the issue of liability. So, if you are at fault, you have to pay compensation to the innocent victims of your bad driving. Except not everyone has a bank account full of dollars to pay awards of damages. So states order you to carry insurance. That way, there will always be some money available to pay for medical expenses and repairs to damaged vehicles.

When this was first introduced, the amount of the minimum cover was high. Law-makers decided to set up this program on a sound financial footing. Unfortunately, decades have gone by without the minimum amounts being reviewed. With inflation, the high amounts have now been reduced to amounts that cannot begin to pay the actual cost of medical treatment and bodywork repairs. This produces an unintended irony. Fearing the driver who hits you will be underinsured, many feel they must buy a separate policy to cover the gap. So responsible drivers pay more because the law-makers have not inflation-proofed the minimum amounts mandated.

Then, thanks to the latest recession, we come to another irony. Because the minimum amounts have not been increased, the real cost of the premiums has fallen. It’s actually a lot cheaper to insure a vehicle today than it was forty or fifty years ago. Yet even these cheap auto insurance policies have proved too expensive for the poor. The result is a significant rise in the number of uninsured drivers. This means the responsible drivers have to pay for another top-up policy against being hit by an uninsured driver.