Third-party liability and car insurance

What is third-party liability car insurance?

Third-party liability insurance responds when an insured is liable for damage to a third-party’s property, or for bodily injury to a third party. So, there are two important things to establish: what does liable mean? And who’s the third party?

Liability

When someone is liable for something, it means they’ve been held legally responsible for it.

Car insurance liability means being responsible for damage or injury caused by a vehicle. In car insurance, liability is related to fault. When a person is at fault for an accident, it means they caused it, or the accident happened due to their action or inaction. In such a case, that person would be liable for all damage sustained in that accident, not just to their car but to all other vehicles, physical property, or people.

However, you can’t really be liable for damaging your own car. If you damage your own car, you’ll either need to have different coverage (usually collision), or simply pay for the repairs yourself. Liability refers to damage to the property of a third party.

Third-party

In third-party liability coverage, the three parties are:

• First party: the insured (anyone covered under the insurance policy)
• Second party: their insurance provider
• Third parties: anyone else

So, when someone is liable for damage to a third party, it means they’ve damaged the property of anyone not covered under their policy.

Third-party liability coverage only applies if there actually is a third party. Say a family has two vehicles insured under the same insurance policy. Two family members are driving the two vehicles, and somehow get into a collision with each other. Since both vehicles are covered under the same policy, there is no third party, and third-party liability coverage won’t apply; they would need to have collision coverage to pay for the repairs instead.

Another example: if you hit your own house with your car, third-party liability coverage still won’t respond — because once again, you can’t be liable to yourself. In this scenario, you would need to make a claim under your home insurance policy.

What does third-party liability car insurance cover?

If you’re liable for damage or injury to a third-party, your car insurance policy’s third-party liability coverage will respond to cover the costs. Those costs may include:

• Repairing or replacing the third party’s damaged property
• Legal fees and settlement costs
• Medical costs

“Damaged property” is quite broad. It can include someone’s house, a business’ sign, or a fence on public property. In some cases, liability coverage is also necessary if you’re at fault for a vehicle accident. Most provinces have a setup that eliminates the need for third-party liability coverage after most collisions (such as DCPD in Alberta and Ontario, or Enhanced Care in BC). But, if you’re driving outside your province or outside Canada, you may need liability coverage if you’re responsible for a collision.

Third-party liability claims generally arise because the third party has filed a lawsuit against the policyholder. When that happens, their insurer will provide legal defense, cover legal fees, and negotiate and pay settlements on the insured’s behalf.

Liability coverage applies to any driver insured under the car insurance policy, as well as anyone driving the car with the insured’s consent.

As with any insurance, there is a limit of coverage and certain exclusions. When you buy a car insurance policy, you can choose a third-party liability limit. You must have at least the legal minimum, which varies by province. The minimum limit is $200,000 in Ontario and Alberta, for example. However, most insurance providers recommend that drivers purchase at least $1 million in liability coverage — liability claims can get expensive quickly, and often exceed $1 million when multiple vehicles or catastrophic injuries are involved.

There are also situations in which third-party liability coverage is excluded, which vary by policy and province.

For example, there’s usually no coverage available if a vehicle was carrying dangerous radioactive or explosive materials. Liability coverage also doesn’t apply to professionals (while they’re on the job) like mechanics, parking attendants, or car salespeople, even if they have the owner’s permission to drive the vehicle. Assuming they’re driving as part of a legitimate business, the business’ liability insurance would cover them. Finally, there are blanket exclusions that apply to most insurance policies, such as those that exclude damage arising from nuclear accidents or war activities.

How much third-party liability insurance do you need?

As mentioned, you need to carry at least the legal minimum of liability coverage to drive a vehicle. Each province sets its own legal minimum, but in most provinces, it’s $200,000.

However, $200,000 isn’t enough coverage. Very few insurance providers recommend less than $1 million in liability, and many recommend carrying at least $2 million.

That might seem like a lot. But, if you’re liable for an accident, those costs can add up quickly. Remember, any amounts for which you’re liable that are over your limit will have to come out of your bank account — so it never hurts to be safe.

The cost of increasing your third-party liability coverage tends to be relatively small.

Commonly asked questions

Who are the three parties involved in third-party liability insurance?

In third-party liability insurance, the three parties are the insured, their insurance provider, and anyone else to whom the insured causes damage or injury.

What is the minimum third-party insurance every driver has to carry?

In Canada, the minimum third-party liability coverage that every driver needs varies by province. In most provinces, the minimum is $200,000. In Quebec, it’s $50,000, and in Nova Scotia, it’s $500,000.

What’s the difference between liability coverage in car and in home insurance?

Liability coverage exists in both car and home insurance policies, but covers liability in different circumstances. Car insurance liability coverage protects you when you’re liable for something related to the ownership or operation of your car. Home insurance liability coverage protects you when you’re liable based on your responsibility as a homeowner or tenant. For example: someone slips on your icy front step. It also covers your liability from non-driving actions (like accidentally smashing a neighbour’s window with a baseball).

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