Compulsory Insurance Definition
What Is Compulsory Insurance?
Compulsory insurance is any type of insurance an individual or business is legally required to buy. Compulsory insurance is mandatory for individuals and businesses that want to engage in certain financially risky activities, such as operating an automobile or operating a business with employees. Compulsory insurance is supposed to protect accident victims against the costs of recovering from an accident that someone else, such as another driver or an employer, has caused.
Key Takeaways
- Compulsory insurance is insurance that must be legally owned to do an activity, such as auto insurance and driving a car.
- Other types of compulsory insurance include workers’ compensation and professional liability insurance.
- Compulsory insurance is a type of insurance that protects victims against the costs of recovering from an accident.
- However, compulsory insurance requirements are not always easy to enforce.
What’s Compulsory Insurance?
How Compulsory Insurance Works
Insurance is regulated at the state level, so each state decides what types of insurance will be compulsory and how much coverage policyholders must purchase. Policyholders may purchase higher limits of coverage if they think the compulsory minimums are insufficient.
Types of Compulsory Insurance
Perhaps the most well-known type of compulsory insurance is automobile liability insurancewhich drivers are required to carry. In the past, physical insurance cards were required. Now, many states allow the use of electronic proofs of car insurance. That is, a mobile application on your smartphone can be used as proof. Automobile liability insurance is not compulsory in New Hampshire and Virginia. Similarly, motorcycle drivers face compulsory insurance in every state except Florida.
State governments try to enforce compulsory auto and motorcycle insurance laws by electronically matching vehicle registration records with insurance policy records. However, compulsory insurance requirements are not always easy to enforce. Despite compulsory auto insurance laws, many drivers are not insured. Some drivers refuse to purchase insurance even though it is compulsory, either because they can’t afford one or simply don’t want to pay the premiumswhich can be especially high for drivers with a history of moving violations.
Another common type of compulsory insurance is workers’ compensation. If an employee gets hurt on the job, compulsory workers’ compensation insurance ensures that the employer has a way to pay for the injured employee’s medical care. It also provides lost wages and, in a worst-case scenario, death benefits to a deceased worker’s spouse and children.
Several states require physicians to secure a minimum level of professional liability insuranceaccording to the American Medical Association. The minimum requirements vary greatly, ranging from $100,000 to $1 million per claim and from $300,000 to $3 million in coverage per year.
Although its future may be in doubt, some view the Affordable Care Act (ACA) as a compulsory insurance law—not a law that provides for universal healthcare—because it requires everyone to buy insurance that is subsidized by employers or possibly the government.