When (and how) did car insurance become mandatory?

Even though the first car was invented in 1886, car insurance did not become a thing until a decade later.

Crazier still, mandatory insurance nearly four decades later. Now, auto insurance is required by most states, so no one actually considers when car insurance became mandatory because it is so common.

“Auto insurance did not become mandatory overnight and the price of it was not always at its current level. The escalation in the price and it being mandatory actually closely correlated with the heightened popularity of motor vehicles in the United States during the early 1900s.”

 However, understanding why car insurance became mandatory could help you to make sense of why it is such a pricey expense these days.

When Car Insurance Became the Law

Though car insurance is required in most U.S. states, it is not mandatory through the federal government. Insurance being mandatory is determined by each state, just as the required minimum insurance covered is determined on a state-by-state basis.

The first states to offer liability car insurance were Connecticut and Massachusetts in 1925. The drivers within these states had to buy insurance coverage or provide proof of financial responsibility of at least $10,000. This proof could be presented in the form of cash, stocks, or bonds. Without financial responsibility or insurance coverage, their license would be suspended

These initial insurance requirements were not as we know them today. However, in 1927, Massachusetts changed their laws to mimic what we are used to today. Instead of having the option to show proof of financial responsibility, drivers had to show proof of auto liability before they were allowed to register their cars with the state.

About 30 years later, New York and North Carolina followed Massachusetts’ lead and incorporated mandated car insurance laws in 1950. Other states did not get on board until roughly 20 to 30 years after New York and North Carolina.

The McCarran-Ferguson Act demanded that states regulate insurance laws and industries as a way to protect the public in 1945.

This is what led to many states mandating certain laws that enforce insurance coverage.

For example, Georgia requires drivers to maintain continuous liability insurance coverage on vehicles with active registrations. The state even considers driving with a suspended, revoked, or canceled registration as a criminal offense.

How the First Auto Accidents Led to Insurance

The world’s first recorded automobile accident happened in 1891 in Ohio City, Ohio when James William Lambert crashed into a tree. The vehicle held both James William Lambert and James Swoveland and was the first single-cylinder gasoline automobile. After crashing into a tree root, the vehicle swerved off and smashed into a hitching post.

In 1896, years before insurance was introduced to the public, Henry Wells, a Massachusetts citizen, crashed into Evelyn Thomas, a citizen of New York. Evelyn was a bicyclist who ended up with a broken leg, and Henry spent the night in jail because of the accident

The first person to be killed by an automobile was Bridget Driscoll in Crystal Palace, London, UK, in 1896. Bridget walked in front of a car that was moving 4 mph while giving demonstration rides. Her fatal injuries led to her untimely death.

Though the accident in 1891 was not as severe or deadly as the ones in 1896, they both served as great examples as to why mandated car insurance was needed. Human error added with vehicle malfunctions led to automobiles being a dangerous weapon. 

In all three instances, car insurance could have helped the situation or at least increased the level of alertness within the drivers, potentially preventing the accidents from happening.

Similar to how trial and error led to the implementation of various laws like the Stop and Identify Statute, insurance was enacted the same way. After witnessing similar issues occur multiple times in different locations, governing entities took action to protect the interest of the public

The 1925 Connecticut State Law

Granted, insurance and driving laws in the age of smart cars are different than how they were in the age of the roaring 20s, but they both served similar purposes. Auto insurance was offered as an option to keep drivers safe and prevent driver’s license suspensions.

Car accidents began to grow as an issue amongst automobile drivers, so as an effort to divert this issue, the Connecticut State Law of 1925 was enacted. Due to auto insurance not yet being mandatory, the 1925 Connecticut law pushed drivers to demonstrate financial responsibility.

Drivers could provide proof of this responsibility by:

  • giving a bond of $10,000,
  • depositing other forms of collateral worth $10,000,
  • depositing $10,000 in cash,
  • or purchasing liability coverage at a minimum of $10,000.  

The point of offering financial responsibility as an alternative to automobile insurance was to allow drivers to prove they could cover damages with cash, bonds, or insurance.

The option between one or the other was taken away a couple of years later after it was demonstrated that giving drivers the option was not in the best interest of the public. The only state that currently has no auto insurance requirements in New Hampshire.

Who is responsible for setting auto insurance laws?

As mentioned earlier, auto insurance is not mandated at a federal level. Each state determines whether auto insurance will be mandatory or what laws will be enacted toward car insurance.

The federal government believed that products sold over state lines were in their jurisdiction, but the U.S. Supreme Court in the Paul v. Virginia case ruled against that. It found that selling insurance was not interstate commerce. The ruling gave states the power to regulate insurance. 

To regulate insurance laws, state regulators implement and monitor the following statutes: 

  • Agent ethics
  • Taxation of premiums and companies
  • Financial requirements to prevent bankruptcy
  • Audits and solvency testing
  • Sales and claims procedures
  • Insurance rates
  • The formation of insurance companies
  • Policy forms offered
  • Licensing of agents and brokers

Now You Are Up To Date on the History of Auto Insurance

As you shop insurance providers or look for a new state to reside in, it is important to research each state’s insurance requirements and driving laws and how history affected those laws.

One state may not have the same laws as another state, and some may have harsher penalties for not following various insurance laws.