For example, while in Mexico you caused a serious highway accident in which you hit and totaled another car, resulting in several injuries needing medical attention. After it was found that you were legally responsible for the accident, you would be required to reimburse the driver and passenger in the car you hit for medical expenses they incurred, plus other expenses as determined by the Mexican court, and the value of their vehicle. The liability component of your insurance policy, be it liability-only or full coverage, would pay for any of these expenses up to the limit on the policy.
Auto insurance in Baja is a great deal less expensive than in the U.S. and if you are planning on traveling back and forth more than a few times a year it is recommended to purchase a 6 month or 1 Year policy. Not all Mexico insurance companies are the same and it is worth it to do your homework. We can tell you first hand that it is important to work with a reputable insurance company that is accessible in the case of an accident.