Financial Responsibility Clause

A provision within an automobile insurance policy which indicates that the policy holder has the minimum amount of coverage required by the state that he or she is driving in. Financial responsibility clauses are used to ensure that the driver has the coverage specified by the financial responsibility laws.

Because different states may have different minimum coverage requirements, financial responsibility clauses reduce ambiguity by stating the policy holder always meets that requirement. For example, a driver is required to have at least $20,000 in liability coverage in the state that his car is registered in. While on a business trip, the driver passes through a state with a higher requirement: $30,000. Because the driver's policy has a financial liability clause, as soon as the driver enters the state with a higher requirement, his coverage moves from $20,000 to $30,000.

State financial responsibility laws require individuals to prove they have enough money or assets to cover any damages they may cause. One way to meet the financial responsibility laws is to purchase the state-required minimum auto insurance that includes the financial responsibility clause. However, these requirements vary by state. A financial responsibility law does not always require you to prove you have car insurance, but having auto insurance is the easiest way to meet the financial responsibility law while protecting a driver's personal financial assets.  

As part of, or in addition to, a financial responsibility clause, some auto insurance policies will include a step-down clause, which will actually lower a driver's coverage to state-required financial responsibility minimums, if they're driving a different state with different requirements. In effect, a step-down clause will affect the applicability and scope of a financial responsibility clause to the bare minimum required level. As such, it's important for drivers to fully understand the terms of their auto insurance coverage.

These states allow a step-down provision to be written in a policy:

• California
• Florida
• Idaho
• Indiana
• Missouri
• Nevada
• New Jersey
• New York
• Pennsylvania
• South Carolina
• Utah

State laws are changed and amended regularly, so some of these states may switch their stance on this issue in time. To see if your state allows a step-down provision to lower the limits of a permissive user contact your state's insurance regulator.

If an auto insurance company has the clause to lower your liability limits, then they may also offer a "buy back" type of coverage for an additional charge. For companies that do not enforce this limitation, the same limits chosen by the insured would extend to a loss in which a permissive user operated the vehicle, as we explained above.