I heard that any accident results in arrest. Also you must have Mexican auto insurance.
As regards insurance, third party liability insurance is mandatory, and must be written by a company authorized to write such insurance in Mexico. Proof of such insurance must be provided upon request to a policeman. Failure to provide insurance is generally sufficient basis for the police to conclude you are operating a vehicle illegally, which will almost surely lead to the driver being detained and impounding the vehicle. Of course, if you are involved in an accident the proof of insurance is one of the first things the police will ask about.
Second party insurance - LDW - is another story. The car rental company will try to sell both LDW and personal liability as a package. Most credit cards will automatically provide LDW coverage, including loss of use coverage, for any vehicle rented using the credit card. In most cases, for US citizens renting in Mexico, the credit card LDW coverage will be primary. It will also provide more coverage - higher limits and lower deductibles. But it only applies if you decline car rental company LDW.
Read your rental terms and conditions carefully; the last time that I was checking on car rental options for a Mexico trip several of the car rental sites said they would allow renters to waive their LDW only if the renter provided specific documentation of LDW coverage for the vehicle, and stated that a general description of coverage included with the card was not sufficient. They said the renter needed to provide verification from the credit card issuer that this specific rental was covered. Obviously they are just trying to make it difficult for people to get off the lot without buying their rental coverage.
As to being jailed in case of an accident - Mexico operates under a Napoleonic legal code. If there is an accident, the police will make an investigation and if they conclude that something has occurred that requires detaining one of the parties, they will do so. My understanding is that they will do so if they have reason to believe that is necessary to assure that the gringo takes responsibility for any damages that might have occurred. Of course, they might also be willing to accept some consideration at the scene of the accident as assurance of your readiness to assume responsibility for your actions in lieu of being detained.
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I have rented cars in Puerto Vallarta and in Cabo. Personally I wouldn't hesitate to rent a car again in Cabo. Driving in Cabo is pretty easy. We particularly enjoyed driving to Todos Santos, and if we ever return to the tip of Baja, will spend more time exploring the smaller towns in the loop among Cabo, Todos Santos, and La Paz. I'm more leery now of driving in Puerto Vallarta - not in town, but in the countryside. Several years ago we had a wonderful drive to Tepic from Puerto Vallarta - one of my favorite day trips I've ever taken. I would love to do more trips into some of the inland areas such as that. But I don't perceive those areas as being as safe as they were ten years ago - too much drug trafficking moving along the inland corridors and the area around Tepic has become the primary region in which Mexican heroin is grown and processed. If I do any more rural trips in that area I'm much more inclined to just hire a good driver for the day who can get us around, who has some sense of where the danger spots might be, who can suggest places to go that we wouldn't be aware of, and who can provide some commentary and information.
And for in town stuff in Puerto Vallarta there's no need to drive when the buses are so convenient and cheap. Even taxis are cheap.
