Why is Third Party Liability Coverage so Important in Car Insurance

Did you know that one of the most important parts of a car insurance policy has nothing to do with your car? It's third-party liability coverage. Third-party liability is mandatory across Canada. The only difference between the provinces is how much coverage you need to legally drive your car. But what is third-party liability? And why do you need it? Let's find out. To understand third-party liability coverage, it's important to understand liability itself. If you're liable for something, it means you've been held legally responsible. In car insurance, being liable for something usually boils down to damaging something while driving your car. You may be familiar with the term fault when talking about car accidents. Being at fault for an accident means being liable for the damage caused. That's the liability part. But what about third-party? As you can probably gather from the name, third-party liability coverage covers your liability to third parties. The first party is the policyholder, plus anyone else insured under the same policy, like family members. The second party is the insurance provider of that policy. The third party is literally anyone else. Third-party liability coverage only applies if there is actually a third party. If your family has two vehicles insured under the same policy and two family members driving those vehicles get into a collision with each other, there's no third party. So third-party liability coverage won't apply. If you're liable for damage or injury to a third party, liability coverage will cover those costs. That includes more than you might think. First, the obvious. It covers the cost of repairing or replacing the damaged property. That includes a lot of things. The obvious one is damage to other vehicles. But it also covers damage caused if you run into, say, someone's house or public art display. Many provinces have insurance systems that actually make third-party liability unnecessary for many vehicle collisions. These are the so-called no-fault systems, like DCPD in many provinces or Enhanced Care in BC. But that's a whole other topic. Even in these provinces, third-party liability coverage is still mandatory. The second thing liability coverage includes is coverage for legal fees and legal settlements. Liability and claims usually involve litigation. And I don't need to tell you that things get expensive when lawyers get involved. Many liability claims happen because someone files a lawsuit against the policyholder. If someone sues you for something vehicle-related, your car insurer would provide your legal defense, Next, third on the list, liability coverage will cover any medical costs for which you're liable. That's less important within Canada since most medical costs are covered by public health care or accident benefits coverage. Accident benefits is another mandatory car insurance coverage. But if you're driving outside Canada, for example in the United States, the cost of medical liabilities can be astronomical. Third-party liability coverage is pretty broad, since it covers most situations that could come up when you're driving. But, like any insurance, there are exclusions, things that aren't covered. To start, it won't cover you if you're transporting dangerous, radioactive, or explosive materials. So leave the plutonium at home! Normally, your liability coverage extends to someone borrowing your car with your permission. But that does not include professionals driving your car as part of their job, like mechanics or valet attendants. Hopefully, they're part of a legitimate business with commercial liability insurance, because they can't use your policy on the job. And, even if a liability claim is covered, it's still only covered up to your policy limit. One of the things you choose when you buy your car insurance is your third-party liability coverage limit. That is the maximum amount your policy would pay for on any one claim. By law, you must have a certain minimum amount of coverage. You won't be allowed to buy a policy with a limit under that minimum. In most provinces, the minimum is $200,000. That sounds like a lot, but it actually isn't enough. Remember, third-party liability covers legal costs and settlements, not just actual physical damage. If you're liable for an accident, costs can add up fast. If your liabilities are higher than your coverage limit, you'll have to pay for the excess yourself. Most providers recommend having at least $1 to $2 million in liability coverage. Fortunately, increasing your liability limit tends to be relatively affordable, so why take the risk? That's all for this topic. If you've got any questions about third-party liability or anything else car insurance related, let us know in the comments. To stay up to date with our latest car insurance tips, click the subscribe button below. Thank you for watching, and I hope you found this helpful.