Compulsory Insurance

Published: | Updated: March 31, 2018;

Definition - What does Compulsory Insurance mean?

Compulsory insurance is insurance that individuals, businesses, or other entities are required by law to have in force.

Compulsory insurance usually covers perils that carry heavy financial costs. It is often intended to prevent the insured from financial ruin, ensure the compensation of victims (without burdening the state), or both.

Those who are required to purchase compulsory insurance but operate without carrying any can face penalties, such as fines.

Insuranceopedia explains Compulsory Insurance

Auto insurance is one of the most familiar types of compulsory insurance. Drivers in North America are generally required to have auto insurance while operating a vehicle. That way, if they cause bodily injury or property damage while driving, their insurance policy ensures that the victims can be compensated, even if the driver cannot afford the damages out of pocket.

Some commercial lines of insurance are also compulsory. In most states, businesses with at least one employee must carry workers compensation insurance (though there are exceptions – it is three or more employees in Arkansas and five or more employees in Mississippi, for instance). Like auto insurance, workers compensation is required in order to ensure that victims (in this case, of occupational injuries and illnesses) will be adequately compensated, no matter how many funds the company has available.

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