DEFINITION of 'Financial Responsibility Clause'

A provision within an automobile insurance policy which indicates that the policy holder has the minimum amount of coverage required by the state that he or she is driving in. Financial responsibility clauses are used to ensure that the driver has the coverage specified by the financial responsibility laws.

BREAKING DOWN 'Financial Responsibility Clause'

Because different states may have different minimum coverage requirements, financial responsibility clauses reduce ambiguity by stating the policy holder always meets that requirement. For example, a driver is required to have at least $20,000 in liability coverage in the state that his car is registered in. While on a business trip, the driver passes through a state with a higher requirement: $30,000. Because the driver's policy has a financial liability clause, as soon as the driver enters the state with a higher requirement, his coverage moves from $20,000 to $30,000.

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