The Hard Truth About State-Minimum Auto Insurance

Every state mandates that drivers either carry auto insurance or be able to demonstrate proof of payment should they not have a formal policy. Taking responsibility for one’s driving activity is the law of the land, but unfortunately, when something is law, many people do the bare minimum to stay out of trouble. While that mindset can help drivers with costs in the short term, it can mean disaster should anything ever go wrong.

And according to the Centers for Disease Control and Prevention, things go wrong plenty. According to a CDC study from 2010, the cost of medical care and productivity losses associated with motor vehicle crash injuries was more than $99 billion. That’s close to $500 each year for every licensed driver in the US. Additionally, an American is treated in an emergency room for auto accidents every 10 seconds.

That doesn’t include the direct costs associated with the accident.

For that, the Automobile Association of America (AAA) went one step further with a 2008 study that pointed out the total cost of traffic accidents as $166.7 billion. These costs included medical, emergency services, property damage, lost productivity, police services, and quality of life.

Though the studies above are not as recent as we would have liked, numbers did stay fairly consistent from 2002 through 2010.

Doing the Math Behind an Auto Accident

Now clearly, all of the bill isn’t taken from out-of-pocket expenses. According to the National Highway Traffic Safety Administration, insurance companies typically pay half, while approximately 26 percent is left to the direct participants in an accident. Third parties (i.e. uninvolved motorists, federal/state/local governments, charities, healthcare providers) pay close to 24 percent.

Just for the sake of perspective, let’s look at what happens when you spread these costs out over each driver involved in an accident. We want to deal strictly with auto accident costs, so assuming the $166.7 billion and $99 billion numbers are accurate, actual costs directly associated with the crash would be the difference between those two (about $67.7 billion).

Private insurers, funded largely through the premiums of their customers, pay out $33.5 billion, leaving around $17.6 billion on the backs of crash victims. Divide this last number by the number of persons injured each year — in 2010, the number was around 2.239 million (US DOT) — and you’re left with $7,861 per crash victim. And since the fault of the accident generally lies with one individual, you can see how these costs can become unmanageable without appropriate coverage when more than two persons are injured or killed in an accident.

Plus, that’s just for auto. Without appropriate insurance, you will be on the lam for medical bills and other indirectly related expenses.

In fact, according to the Federal Highway Administration, the average per-person cost of traffic fatalities was $3.2 million in 2005 — for injuries, $68,170.

Coverage Required by State

Currently, Alaska, Maine, and Wisconsin are the only states with a minimum requirement of $50,000 per person and $100,000 per accident. Most states stay in the $15,000 to $25,000 range (up to $50,000 per accident) and around $25,000 for property damage liability.

If you cause a traffic accident that results in an injury to one other person, in most states, you’ll be responsible for at least $18,000 that your minimum insurance doesn’t cover. If it’s a fatality, lots of luck!

In Summary

States mandate that anyone sitting behind the wheel of an automobile has at least some skin in the game. By ensuring that drivers are taking financial responsibility on the road, they can control the costs of insurance for everyone. However, there are lots of moving parts in an accident that go well beyond the road yet are no less a financial responsibility for the person who is at-fault for the accident. If you really want peace of mind from your insurance, then you need to adopt coverage that goes well beyond the state-minimum requirements. It may mean paying more per month, but it could result in paying much less over a lifetime.

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