When you’re searching for any type of insurance coverage, you may wonder whether a specific type of insurance is required by law or merely recommended.
In some cases, it is up to the consumer whether to purchase insurance or not. In others, there are federal regulations, while in still others, industry standards or expectations may make insurance coverage essentially mandatory even when it’s not regulated by US or state law.
Life coverage, for instance, is completely optional. Whether you want to invest in a life insurance policy to protect your family financially in the event of your untimely death is totally up to you.
Other types of insurance, however, are compulsory, meaning that you have to buy them if you engage in certain activities. For instance, if you drive a car, most states require you by law to take out at least a minimum amount of auto insurance. The same applies to some types of business insurance if you start a company.
In this post, we take a look at the legal insurance requirements in the US for different types of coverage so that you can be properly protected and avoid potential litigation.
How Does Compulsory Insurance Work?
In non-compulsory insurance markets, you’re free to choose the level of coverage you’d like. So, for instance, if you apply for life insurance, the insurer will ask you how much protection you want and then calculate your premiums based on that number.
In principle, you’re free to choose whatever level of coverage you like, from a few cents all the way up to millions of dollars (though most people will choose around four to ten times their annual income). The insurance company will then calculate your premiums based on your risk.
Compulsory insurance, however, is different. Here, the state or federal legislature determines the minimum amount of insurance that you require if you engage in specific activities.
You can think of compulsory insurance as setting a baseline. You have to buy a certain amount of coverage to protect yourself and others, but you are also perfectly free to add additional coverage.
For instance, if you drive a vehicle, you usually are required to have insurance that will pay to cover a damage caused to third parties should you be the cause of an accident. However, adding breakdown coverage to your policy is entirely optional.
Types of Compulsory Insurance
Let’s run through some common types of compulsory insurance in the US and when you might encounter them:
Worker’s Compensation Insurance
Employers regularly face litigation from workers for injuries sustained on the job. If courts find the employer negligent, they may have to pay compensation for lost wages, court costs, additional compensation pay and even death benefits to the worker’s family. Bills can reach hundreds of thousands of dollars.
Worker’s compensation insurance is a legally-mandated type of business coverage that protects companies against this risk and ensures that employees receive benefits in the event of on-the-job injuries or negligence. Individual states determine whether they require this type of insurance (most do require it).
Physicians’ Insurance
Physicians are at high risk of litigation for medical malpractice. In many cases, just defending a case is expensive, even if the courts exonerate you.
The vast majority of doctors have professional liability insurance as standard to protect them from lawsuits that they might face. Some states, however, actually mandate it, meaning that physicians cannot opt out.
The amount of coverage that these laws require doctors to take out varies from state to state. But requirements can range from $100,000 to $1 million per claim, and up to $3 million per year. Most doctors will choose substantially more than this, just to be on the safe side.
Auto Liability Insurance
Practically everyone who drives has to take out auto liability insurance by law. This insurance protects you against damages and litigation by a third party if you get involved in an accident that is your fault.
Two states, however, buck the trend and do not require this form of car insurance: Virginia and New Hampshire. Everywhere else, the law requires you to purchase auto insurance if you drive a motor vehicle.
Motorcycle Insurance
Motorcycle insurance, like auto liability insurance, is another form of compulsory insurance for anyone who rides a motorbike. It is required in every state except Florida.
Why Should You Get Insured When It’s Not Compulsory?
Although not every type of insurance is required by law, there are many types that are required in other ways or recommended for your own safety and protection.
For example, home insurance is not required by law, but banks do require it to receive a loan. Unless you’re paying the entire amount for your home up front, home insurance will be necessary—and even if you’re skipping the loan from the bank, home insurance is highly recommended to protect you should your home be damaged or destroyed.
Many people choose more than the legal minimum coverage amount when choosing compulsory coverage, and many more choose to also purchase insurance that is not legally required.
Take auto insurance, for instance. It helps to have third-party liability coverage. But other forms of insurance, such as collision and comprehensive coverage, give you added protection in the case of an accident, whether it’s caused by you or another party.
You should always take the time to choose the level of coverage appropriate for you, not just fulfill the bare minimum legal requirements. Buying too little could mean you struggle to recover financially from an accident or litigation. If you’re stuck, our experienced insurance agents at Bethany Insurance can help you choose the correct level of coverage for your needs.
