The ramifications for not adding your roommate to your policy but still allowing him to drive your vehicle can vary depending upon your state's laws and your insurance company's guidelines.
In general, the consequences of not adding a household member to your policy when it is required by your insurer is that if he was in an accident in your car they would deny claims since he was not a driver on policy and thus you were not paying premiums for him to covered to drive your vehicle. We have heard of some insurance carriers that will cover a household member that was not listed on the policy.
Most state laws and insurance companies require you to list all licensed household members on your policy and either add them as drivers or exclude them. It does not appear that in New Jersey you could totally exclude your roommate from your policy, only from comprehensive and collision coverages.
The NJ Department of Insurance (DOI) states that a named driver exclusions endorsement is available with some insurers. In New Jersey this type of endorsement is available for the comprehensive and collision portions of standard policies. This endorsement allows certain licensed drivers within the household to be excluded from the rating of comprehensive and collision costs of a particular vehicle on the policy. However if the excluded driver does, for any reason, even in an emergency operate the vehicle there would be no coverage afforded for repair to the vehicle in the event of an accident.
The New Jersey DOI also notes that it is important to tell your insurer about all licensed drivers in your household, even if they are covered by other policies. This is because insurance companies are permitted to use classifications that reflect a possible exposure for liability on the part of the insurer, in the event that bodily injury or property damage occurs due to any licensed driver in the household’s operation of the vehicle. So the premium amount they are asking for your roommate to be added as a driver is to cover their risk exposure brought on by him driving your car.
The $1,200 difference is likely because that the amount of exposure the insurance company has. Keep in mind not only may you have claim issues if you let your roommate drive your vehicle without being added to your policy but also failure to disclose all of the drivers in a household to your insurer can be construed as a form of insurance fraud. Those that are found to guilty of this type of fraud can be subject to policy cancellation, civil fine, or penalty under the New Jersey Insurance Fraud Prevention Act.
New Jersey law notes that auto insurance fraud occurs when people knowingly misrepresent pertinent facts to a company or agent to obtain a policy or collect money to which they are not entitled. Omitting a licensed household member from your application or policy is a misrepresentation of facts and is considered soft fraud by the NJ DOI. Any form of auto insurance fraud is a serious crime in New Jersey that can lead to heavy fines and possible jail time.