What is one reason for having car insurance?

What is one reason for having car insurance? The question is often answered through a short list of standard justifications: legal requirement, lender obligation, and general risk protection. This framing, while common, does not fully capture the underlying rationale, according to this analysis from Auto Insure News. The sections that follow examine the financial basis for carrying coverage, supported by claims data, state requirements, and documented cost comparisons.

What claims actually cost

The exposure is easier to understand with real numbers. According to figures compiled by the Insurance Information Institute from ISO claims data, the average bodily injury liability claim reached $26,501 in 2023, and the average property damage liability claim came to $6,551.

Collision claims, which cover damage to a driver’s own car, averaged $5,992 in 2022. Comprehensive claims, covering theft, hail, fire, and animal strikes, averaged $2,738 that same year.

Source: Insurance Information Institute, based on ISO claims data.

These figures are averages, so roughly half of all claims cost more than the amounts shown. The trend is also moving upward: bodily injury claim severity rose 9.2% year over year in 2024, according to LexisNexis Risk Solutions.

This puts the value of auto insurance into perspective. When a single accident can result in thousands of dollars in property damage or tens of thousands in injury-related costs, paying for coverage is not simply about meeting a legal requirement. That is why you need car insurance: to help cover potentially high costs that can arise when an accident happens, and to protect yourself from financial losses that can be difficult to absorb on your own.

Why state minimums often fall short

Many states set minimum liability requirements at 25/50/25, meaning $25,000 per injured person, $50,000 per accident, and $25,000 in property damage. Measured against the $26,501 average injury claim cited above, that minimum is already insufficient in a typical case. A serious crash involving surgery and missed work is not an unusual outcome; it is closer to an ordinary one.

Ohio’s Department of Insurance publishes its own 25/50/25 minimums, then adds a caveat that many agents leave unstated: those figures represent bare minimums, and a serious crash would require significantly more coverage to be fully paid for.

Any amount above a policy’s limit becomes the driver’s own responsibility, paid from savings, wages, or a judgment that can take years to resolve.

A side-by-side comparison

Consider two drivers involved in an identical accident that causes $48,000 in medical costs for the other party and $9,000 in vehicle damage.

Illustrative example. Actual outcomes vary by state, policy limits, and fault determination.

Legal requirements of the state

Forty-nine states and the District of Columbia require drivers to carry liability coverage. New Hampshire is the only exception, though drivers there must still prove they can cover damage they cause. Drivers with certain past violations are required to carry a policy regardless, according to the National Association of Insurance Commissioners.

The requirement exists to ensure that funds are available when someone is injured, not to protect insurance companies directly.
>>> Learn more: Is Auto Insurance Required in New Hampshire?

Cost of driving without required coverage

Skipping required insurance ends up costing more than the premium saved. Depending on the state, a driver can face fines, license suspension, and towing or storage fees. Illinois, for example, charges roughly $150 to tow an uninsured vehicle, plus $25 to $50 a day in storage.

Virginia requires drivers cited for an uninsured-vehicle violation to file SR-22 proof of coverage for three years and pay a $600 statutory fee, according to the Virginia Department of Motor Vehicles. That filing tends to keep premiums elevated well past the original violation.

>>> You might be interested: How much can an accident cost?

Six factors that shape how much coverage a driver actually needs

• Liability insurance protects other people, not the policyholder’s own car. Collision and comprehensive coverage are separate purchases. This distinction matters: 27% of collision claims were declared total losses in 2023, according to LexisNexis. For drivers who depend on their car for income, that figure is significant.
• A substantial share of drivers carry no coverage at all. The Insurance Research Council found that 15.4% of U.S. drivers were uninsured in 2023, with another 18.0% underinsured. Combined, roughly one in three drivers nationally cannot fully pay for damage they cause. The share ranges from 5.7% in Maine to 28.2% in Mississippi. Uninsured and underinsured motorist coverage, usually one of the less expensive additions to a policy, exists specifically to close this gap.
• Medical bills do not wait for fault to be determined. Personal injury protection and medical payments coverage pay for treatment immediately, regardless of who caused the crash. Personal injury protection can also cover lost wages, while medical payments coverage is narrower and limited to medical and funeral costs.
• Lenders impose their own coverage requirements. A financed or leased vehicle typically must carry collision and comprehensive coverage at limits set by the lender. Allowing that coverage to lapse can result in the lender purchasing its own more expensive policy and billing the borrower for it.
• Repair delays carry a cost of their own. Rental reimbursement and roadside assistance are relatively minor line items, but they determine whether several weeks in the shop amount to a minor inconvenience or a significant disruption, particularly for drivers without a second vehicle.
• A lawsuit can cost more than the accident itself. If a driver is sued after a crash, liability coverage pays for legal defense in addition to any damages. In a contested case, the legal bill alone can exceed the eventual settlement.

What a standard policy will not pay for

Several exclusions are worth understanding before a claim occurs, not during one. Standard policies do not cover mechanical breakdown or the effects of deferred maintenance, as these fall under a manufacturer’s warranty rather than an insurance policy. They also exclude theft, hail, flood, fire, and animal collisions unless comprehensive coverage is in place.

Delivering food or driving for a rideshare service typically requires a separate endorsement or a commercial policy; standard coverage does not extend to that use. Items stolen from inside a vehicle, such as a laptop or tools, generally fall under a renters’ or homeowners’ policy instead.

Every policy also carries a fixed limit. If a claim totals $200,000 and the policy limit is $50,000, the remaining $150,000 becomes the policyholder’s responsibility. Intentional damage and claims involving a driver specifically excluded from the policy are entirely outside the scope of coverage.

How much coverage is actually enough

A reasonable starting point is to price 100/300/100 coverage and compare it with the state minimum, rather than treating it as an upgrade. The price difference is often smaller than expected, since the first dollar of coverage tends to cost more than the last.

Uninsured and underinsured motorist limits should generally match liability limits, given how many drivers on the road carry inadequate coverage.

Collision coverage on an older vehicle should be reviewed periodically. A common industry guideline holds that once the annual premium plus deductible approaches roughly 10% of the vehicle’s value, the coverage may no longer be cost-effective. Drivers whose assets exceed their liability limits should also consider an umbrella policy, which is typically inexpensive relative to the protection it provides.

Requirements and pricing vary by state, so a state insurance department’s website remains the most reliable source for confirming what is actually required before purchasing coverage.

Reducing cost without reducing protection

Obtaining three quotes at every renewal is one of the more effective habits, since insurers reprice risk continually, and loyalty rarely results in a discount. If you are comparing rates, it helps to understand how to get auto insurance quotes and what information insurers use when determining your premium.

Raising the deductible on collision and comprehensive coverage is typically a more effective way to lower a premium than reducing liability limits. The tradeoff should still be set at a level a driver could pay immediately; a $1,000 deductible only produces savings if it does not itself become a financial strain.

It is also worth asking an insurer directly which discounts may apply, including multi-policy, paid-in-full, defensive driving, and low-mileage discounts.

Telematics programs can lower premiums for drivers who brake gently and drive fewer miles, though they can increase costs for drivers with rougher habits or frequent late-night driving. Add-ons such as rental reimbursement and roadside assistance are reasonable candidates for reduction; liability coverage, which protects future income, generally is not.

Several states also operate low-cost insurance programs for qualifying drivers, with California’s program among the most established. Forgoing coverage to save on a monthly premium remains, by most measures, the more costly choice: a single at-fault accident can offset a decade of savings.