Even if you drive in the U.S. with top-notch auto insurance, it will not cover your car in Mexico. The penalties can be steep, so don't cross the border without buying appropriate coverage. It's also a good idea to read the latest safety warnings from the U.S. Department of State about driving in Mexico.
Mexican liability insurance laws
Liability automobile insurance pays for damage your car does to other people, their vehicles, and their property. Under Mexican law, the only valid liability insurance is what's issued by insurance companies licensed in Mexico. No American insurers are licensed in Mexico so you'll have to buy a temporary liability policy from a Mexican insurance company before you cruise into the country, even for a day or a weekend. To cover your own car, you can purchase a policy from companies in cities at either side of the border. You'll also need to buy liability insurance if you're renting a car in Mexico, and this expense may not be included in the rental price. Be sure the liability policy includes attorney fees and bail, in case you are arrested after an accident.
Driving into Mexico without this insurance is a big risk. If you are involved in an accident and have no valid liability insurance issued by a Mexican-licensed company, the police may throw you in jail and impound your vehicle until all of the claims have been settled.
Collision and comprehensive insurance
Collision insurance covers damage to your own car in an accident, while comprehensive insurance covers damage to your car that did not result from an accident, like theft, fire, or hitting an animal. Some U.S. insurers offer limited collision/comprehensive protection for damage to your vehicle if you travel a short distance across the border. You should ask your insurer and thoroughly review the terms of the policy. This coverage does not fulfill the legal requirements regarding liability insurance under the laws of Mexico though, so you will have to get Mexican liability coverage in any event.
When you buy Mexican insurance, you can ask for a policy that covers damage to your car, including theft and vandalism, as well as liability. Roadside assistance and medical care for the driver and passengers can also be included.