DEFINITION of ‘Compulsory Insurance’
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. 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.
INVESTOPEDIA EXPLAINS ‘Compulsory Insurance’
Perhaps the most well-known type of compulsory insurance is the automobile liability insurance which drivers are required to carry. For example, since 2001, Mississippi drivers have been required to carry auto liability insurance and keep their proof of insurance cards in their vehicles. The only state where automobile liability insurance is not compulsory is New Hampshire. Similarly, motorcycle drivers face compulsory insurance in every state except Hawaii, Montana, New Hampshire and Washington.
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, up to 25.9 percent of drivers are not insured in some states (as of 2012). Nationally, 12.6% of drivers were uninsured as of 2012, according to the Insurance Information Institute. Some drivers refuse to purchase insurance even though it is compulsory either because they can’t afford one or don’t want to pay the premiums, which 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.