Help a Reader: Posting a Bond as Insurance

Here's a question a reader left on my post titled What It Means to Be Self-Insured:

I have "heard" that instead of paying for liability insurance for your vehicle, you can post a bond for whatever the minimum amount of liability required. That way, YOU earn interest on your bond, not the insurance company. Anyone know different?

I haven't heard anything about this. Anyone have a clue what he's talking about?

Comments

[JD from Penny Saved]

Auto insurance laws vary by state. For instance, in Pennsylvania, you are required to have liability insurance (mandatory coverage), and cannot "self-insure" with a bond or any other method. Your state may, however, allow you to post a bond or provide proof of financial ability to pay (although I think very few allow this anymore). Even if you are allowed by law, the next question is whether you should. You are taking a significant financial risk - possibly millions if you are at fault in an accident. Auto insurance is relatively cheap considering the alternative.

[Jake Stichler]

I don't know about that, JD - I live in PA and have looked into PA's self insurance before. However, it was prohibitively expensive. Actually, right here's PennDOT's PDF on self insurance for an individual: http://www.dot3.state.pa.us/pdotforms/misc/self_ind.pdf

For example, the minimum security for the first secured vehicle is $50,000, every next vehicle is $10,000. There's also a pretty tight 72 hour deadline for replenishing that money if you ever have to take out of it. In other words, self insurance (at least in PA) is only for rich people.

[Apex]

The key point is what JD said about if you would want to.

Whatever the minimum on the bond would be (probably something like 50K like Jake alludes to), that is to ensure you have the money available to pay a claim for atleast that much. So if you have a liability claim that you lost in court (and it would be your cost to defend yourself since you don't have an insurance company trying not to pay and thus defending against you), you would lose all of that 50K if the liability claim was for atelast that much (it's hard to imagine much of a claim that wouldn't reach that number pretty quickly). But even after losing all that 50K, you are still liable for whatever the full amount of the claim is. If you have no money at all then maybe you don't care, just declare bankruptcy (although I am not sure if a judgement could be put on your future earnings). But if you do have any other assets the plantiff's lawyers are coming after all your monies until they get the full amount of the liability claim.

Liability insurance is actually pretty cheap. It's well worth paying. Much more economical than PIP or Uninsured or underinsured driver. Those are insurance levels that if they would let you not carry you could take the risk on your own and if you had medical insurance all you would risk losing would be the value of your current vehicle. But with liability claims you risk losing everything you own. This is why I carry a 2 million dollar umbrella policy over everything I have that could create a liability claim. And when you take out a policy like that they require you to up your auto liability to 300K/500K/300K (so you can see when the insurance company has some exposure they consider 50K to be a joke as far as being sufficient coverage).

If you think about it, what is your liability if you run a brand new 18 wheeler off the road loaded with crude oil? The truck and tractor itself could be worth 300K let alone its cargo. What do you think your exposure is if you criple a doctor for life. Lost wages and you start adding up to over a million real fast.

Not carrying liability insurance but instead trying to post a bond to save a few dollars in interest on the measely couple hundred bucks per year that the insurance company will charge you for liability coverage seems like about the worst risk/reward trade-off I have heard of.

I think this type of a question probably comes from someone who is not fully aware of their risks. And thats understandable because it's not immediately obvious to a lot of people what the risk is. I assure you, its massive. Please, Please, Please, DO NOT SELF INSURE FOR LIABILITY.

[Foobarista]

CA has self-insurance, but we did the same math as Apex and we came up with a similar conclusion. We carry "liability-only" insurance on our cars, with a ton of liability, and an umbrella policy above that amount.

We have enough cash in our longer-term e-fund to cover replacing our cars, so we figure we don't need non-liability insurance, and can save the $1K/year or so it would cost.

[Matt Bramanti]

Here's the Texas statute:

http://www.statutes.legis.state.tx.us/SOTWDocs/TN/htm/TN.601.htm

Basically, you can either post a $50,000 surety bond backed by real property, or deposit $55,000 in cash.

[rxjohnk]

So it seems that it doesn't make much sense for an individual to self-insure for liability insurance, but what about Collision or "Comprehensive" insurance? How many months would you have to pay premiums to yourself to pay off a car if it were totaled? This may make sense for larger families or people who have more cars, since you would be spending more on insurance for more cars, but it would bbe unlikely that you would wreck all of them at once... Hail, however, would be a different story.

Just a thought.

[Rick]

Many of the commenters are worrying about what happens if the claim exceeds your ability to pay. For instance, if you post a $50K bond, but the claim runs into the millions, what happens then?

This is where reinsurance comes in. Reinsurance is basically insuring against losses that exceed your own ability to pay. This would be rather cheap, compared to your typical monthly auto insurance premiums. For instance, (and I'm just making up numbers here), you might typically pay $100/month for insurance with a $1000 deductible. You might decide to self insure and post a 100K bond. And then purchase reinsurance for an amount greater than, say, $500K, for a much lower amount, maybe $15/month. It's essentially the same as having a $500K deductible. The premiums are much lower.

I don't know if reinsurance is available for autos, but this is how companies that insure themselves work.

[Foobarista]

As for non-liability insurance, we don't bother and have enough money in our longer-term e-fund to pay for a replacement car if we need to. This is one of the benefits of buying cars with cash - you don't need loan-mandated insurance on the car.

[Maria]

What about homeowners insurance?

[MacyArrar]

Car accident and drunk drivers are the most pressing problems of our everyday life.
According to the World Health Organization, each year 1.2 million people die and nearly 50 million of people are injured or became disabled in car accidents. The cost of road traffic injuries for each country is almost 518 billion dollars per year, which is from one to two percent of their average Gross National Product. By 2020, the car accident will be the tenth leading cause of death in the world.
To solve the problem and reduce death rate of car accidents on the roads, according to World Health Organization, it is necessary to resolve the five major tasks: riding a motorcycle without a helmet, problem of road infrastructure, problem of speeding, problem of alcohol consumptions and the usage of safety belts.
In the whole Europe the death rates during car accidents has steadily decreased: in 1991 – 162 deaths per 1 million citizens, in 2004 – 95; in 2007 – 77. In 2007, the most dangerous roads in Europe were in Lithuania, where out of every million people in the car accident died 223 people, and in Latvia – 177. But still some other new EU members remain problematical, such as Estonia and Poland where the number of car accidents continue increasing.
The main reasons of car accidents are: the tendency of modern European drivers to constantly increase the speed of driving, neglecting the rules of safety belts usage and security facilities for children (child seats). In most of the Eastern European countries that undergo rapid motorization, road infrastructure development, the progress of security services cannot withstand the increased load.
The experience of countries with developed motorization, such as Canada, France, Finland and the United States, proves that to reduce car accidents and avoid the enormous social and economic losses the next steps should be followed:
Car accident
• a flexible and adequate legislative framework for the organization of traffic;
• road infrastructure: to settle pedestrian crossings, repairing roads, provide the necessary number of parking spaces;
• pay special attention to promotion of traffic safety and clearly show the consequences of traffic violations to people.
The main focus of foreign legislation system, to avoid car accidents on the road and provide its safety is the violators’ liability.

[Emiptbomoppok]

My own insurance company just told me they will raised my costs because of an at fault auto accident, but I didn't get any ticket for that accident. Is this : fair?