Offers health, renters, home, life, and auto insurance policy quotes, comparisons, and information on annuities.
Why Auto Insurance is Required
Of all of the personal lines of insurance, only auto insurance is mandatory. (To be more specific, it’s required if you drive a car on public roads. Those who ride the train or drive only on private roads aren’t obligated to get coverage.)
So why does the government require insurance?
In answering this question, it helps to understand the economic concept of externalities. (You don’t need a Ph.D. to understand the definition, so don’t click away just yet!)
An externality is a result of a particular economic activity, an activity either conducted by a person, business, or government. Shortened, an externality is a side effect.
Externalities can be both positive and negative, but the ones you hear about in the news are usually negative.
Take the example of a nuclear power plant, which is dumping the water it uses to cool its reactors into the nearby stream. The hot water alters the river’s ecosystem and all of the fish subsequently die off.
Meanwhile, down river, Bob, who operates a fly-fishing outfit, is suddenly faced with a fishless river. He is the victim of a negative externality. He had no economic stake in the nuclear plant’s activities, but he is paying a price nonetheless.
OK. Now that we understand externalities, let’s get back to car insurance.
It all has to do with the unique ability of cars to cause significant damage, either in the form of property damage or bodily injury.
“We force people to buy auto insurance to protect others,” says economist and writer Megan McArdle. “Drivers have a high potential to cause damage they can't pay for.”
In a car insurance-less world, driving would be too financially risky; someone could smash into your car, send you to the ER with a broken leg, and that someone could be unable to pay for the damage that their recklessness caused.
In such a world you’d be stuck with the bill.
In short, McArdle says mandatory car insurance is “a social arrangement to minimize externalities.”
sponsored links
Compare Insurance Offers
Insurance Resources
Encyclopedia article covering topics such as types, principles, indemnification, the insurance industry, and controversies.
Provider of personal financial services and insurance coverage. Get quick online quotes for home, life, auto, and business insurance.
Provides a broad overview of the insurance industry, including its nature, working conditions, occupations, earning potential, and outlook.
Free online car insurance quotes. More than auto insurance, get quotes for motorcycle insurance, ATV, RV, homeowners, renters, condo, mobile home, ...
Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer. ... Types of insurance fraud are very diverse, and occur in all areas of ...
Information about all Life Insurance programs administered and supervised by VA
Insurance - from WN Network. WorldNews delivers latest Breaking news including World News, U.S., politics, business, entertainment, science, weather ...
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the U.S. Congress to maintain stability and public confidence ...
