Financial Responsibility Law

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Will Kenton
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Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.
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Updated September 30, 2021
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Michelle P. Scott
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Reviewed by Michelle P. Scott
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Michelle P. Scott is a New York attorney with extensive experience in tax, corporate, financial, and nonprofit law, and public policy. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively.

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Daniel Rathburn
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Fact checked by Daniel Rathburn
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Daniel Rathburn is an editor at Investopedia who works on tax, accounting, regulatory, and cryptocurrency content.

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What Is Financial Responsibility Law?

Financial responsibility law, commonly associated with vehicles, are statutes that require an individual or business to prove that they can pay for damages resulting from an accident. Financial responsibility law does not specifically require the party to have insurance coverage. Instead, the law requires that they be able to demonstrate the financial capacity to pay for the full amount of the damages, even if they are not at fault.

Key Takeaways

  • Financial responsibility law (commonly associated with vehicles) requires an individual or business to prove that they have enough money or assets to pay for damages resulting from an accident.
  • Financial responsibility laws are state-specific, so they may vary depending on where the individual lives, and a failure to comply could lead to stiff penalties.
  • Most auto insurance policies provide enough coverage to satisfy the requirements of financial responsibility laws, so keeping even the minimum amount of coverage can protect you from violating them. 

Understanding Financial Responsibility Law

Almost all states mandate some level of automobile liability insurance coverage by individual vehicle owners. Currently, only New Hampshire and Virginia do not require some level of such liability insurance coverage.

In instances where an accident has occurred and the person at fault does not have insurance coverage, financial responsibility laws prevent the burden from falling entirely on the non-guilty party.  

Many states consider an individual with an insurance policy to be compliant with a financial responsibility law. This is because most insurance policies have a minimum coverage limit that meets the state standard. In some states, this proof of insurance coverage or some proof of financial responsibility is required to register a vehicle.

Depending on the state, a surety bond can serve as an alternative to insurance coverage to satisfy financial responsibility laws. Some states will hold a cash deposit from the vehicle owner instead of requiring insurance. A business that maintains a fleet of vehicles operated by employees might be allowed to self-insure to comply with financial responsibility laws. The self-insurance option is typically not made available to individuals.

In Virginia, an individual can pay an uninsured motor vehicle fee of $500 at the time of vehicle registration. This does not remove financial responsibility from the owner if there is an accident with the vehicle. It also doesn't provide them with any form of insurance coverage. Virginia’s uninsured motor vehicle fee is valid for 12 months.

In states like New Hampshire and Virginia that do not require auto insurance minimums by law, there are often other expenses that replace these savings, such as the responsibility to cover damages in an accident or the requirement to pay the state $500 per year, respectively.

Financial Responsibility Law Requirements

Evidence of compliance with financial responsibility laws can be demanded by authorities for a variety of reasons. Proof can be required after an accident has occurred by police during traffic stops not related to accidents when registering a vehicle, and when seeking the reinstatement of a revoked or suspended driver’s license.

Failure to provide proof of compliance with the law can lead to penalties, such as fines to the operator of the vehicle, the suspension of the operator’s license, and the suspension of the vehicle’s registration. This could also affect future attempts to procure auto insurance. Insurers might increase the rates they charge an individual who failed to comply with financial responsibility laws and it may even be difficult to find a company that will offer coverage altogether.

Lack of compliance with these laws can put other assets, such as a home, at risk if the vehicle owner does not have the financial resources to pay for damages that stem from accidents they are held liable for.

Article Sources
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  1. Virginia Department of Motor Vehicles. "Insurance Requirements." Accessed Dec. 5, 2020.

  2. State of New Hampshire Insurance Dept. "Your Guide to Understanding Auto Insurance in the Granite State," Page 1. Accessed Dec. 5, 2020.