Question

An insured had an accident in another state that required liability limits of 25/50/25. Our insured had 10/20/10 limits. What happens if the liability he incurs exceeds 10/20/10?

1• Our insured's license will be revoked since he did not comply with the other state's requirements
2• Our insured's policy will respond to the higher limit of the other state
3• Our insured's policy will pay up to its 10/20/10 limits and the insured will be responsible for any balance
4• None of the above

Answer 1

The insured will be liable for damages that exceed their policy limits of 10/20/10. This highlights a key insurance principle: insurers must balance premiums with potential payouts to remain solvent and may choose to not operate in markets with unfavorable regulations.

Step-by-step explanation:

If an insured has an accident in another state that requires liability limits of 25/50/25 and they only have limits of 10/20/10, the correct response is that the insured's policy will pay up to its 10/20/10 limits and the insured will be responsible for any balance. This means that if the liability incurred exceeds the 10/20/10 limits, the insured will have to cover the remaining costs out of pocket.

In the broader context of insurance regulation, state insurance regulators aim to keep premiums affordable, but this may lead to a situation where insurance companies avoid insuring higher-risk individuals or may choose to withdraw from the market altogether. This is due to the fundamental law of insurance, which states that the average amount paid out cannot exceed the average premiums collected. In cases where insurers are forced to keep premiums low, they face the risk of not being able to cover the costs of claims, which can lead to significant business decisions such as withdrawal from specific states.