June 21, 2011

Why States Have Different Minimum Auto Coverage Amounts

When it comes to auto insurance, it can often be difficult to determine exactly why each company charges as they do, and why they require certain minimum amounts of coverage. Many customers that have moved from state to state over the course of their driving life will have noticed that minimum amounts of coverage change with each new state, often without a word of explanation. One state may require only $5,000 of BI or PD coverage, while others require $25,000 or more. This is not a cost that a client has any say in, and any company that does not charge this amount will not be permitted to operate in the state for very long. But why is there such a large disparity?

In large part, this variance in minimum coverage can be attributed to the work of auto insurance commissions in each state. While not every state has an insurance commission, most do, and they are responsible for determining the minimum coverage amounts that every company who operates in the state must charge. These amounts are based in part on the number of accidents that occur within the state, but also the amount it typically costs to fix a car in the state. These two factors together make up the bulk of the reasoning behind the minimum coverage amounts that auto insurance companies are forced to offer.

Companies are always permitted to offer more than this amount to clients, but can never offer less. While they may get away with doing so for a while, and would be popular with a number of customers for doing so, once they were reported to the commission, they would no longer be able to sell insurance products in the state. No company wants to risk being put out of business in any state, and so will always offer the minimum amount to any customers. If there are ever any doubts about what that minimum amount is, clients should always refer to their state insurance commission for more information.

Auto insurance companies will try to mitigate the costs of higher minimum coverages by offering things like lowered premiums and higher deductibles in order to give customers a better upfront deal, and may offer more robust coverages in states where the minimums are quite low. As a state responsibility, it is important to understand that the federal government has no authority to regulate what a driver pays for insurance, and that a state can choose to lower or raise the minimum at any time, so long as it gives fair warning to both consumers and the companies that provide insurance services to them.