Financial Responsability Clauses are designed to proctect the interest of the lien holder (most of the time the bank). Protect your rights over of the bank's! They also protect you from different states limits of liability.
This clause is often spelled out in your policy. It gives you the freedom to go form state to state knowing that you have the minimum amount of coverage required by law. For example, Mississippi’s minimum required injury liability coverage is $25,000. North Carolina’s minimum required injury liability coverage is $30,000. If you are a Mississippi residence and have a policy from that state, but you are traveling through North Carolina, then your policy limits will be adjusted to conform to state law (the state you are physically on). In this case, this will give you a $5,000 increase of coverage.
Financial Responsability clauses will give you peace of mind to always be within the minimum required insurance in any state.
The second aspect of Financial Responsability clause is the obligation to protect lien holder’s interest. What? Yeah, if you are about to get a settlement, then lien holders will be paid first.
Who can hold a lien? Anyone the insured or the person entitled to the settlement (that includes claimants) owes money to. The bank will put a lien against the settlement for damages to the vehicle; this will force the insurance company either to fix the vehicle or to pay the bank’s interest. If there is any excess (between what you owe, and what they are paying), then those funds will be forward to you.
However, banks are not the only ones that can put a lien against the settlement. Medical providers, attorneys, the IRS, unpaid child support, unpaid bills, attorneys, rental car companies, and anyone that has a judgment against you!
Financial Responsability Clauses work very well for the bank and the insurance company. Banks will require you to have full coverage in your auto, and the insurance policy gives the bank full protection in case an accident happens.
Liability Coverage is required by Law. Financial Responsability clauses ensures you have the right amount of that coverage. Read more on Liability Coverage.