Third-Party Liability Insurance Explained: What It Covers and How Much You Need
What is third-party liability insurance?
Third-party liability insurance is a type of car insurance coverage that can pay for other parties’ medical costs or property damage repair bills along with your own legal fees if you’re legally responsible for injuries or property damage while driving.
Liability doesn’t protect your own vehicle, and it won’t pay any of your medical bills or repair costs. It exists to ensure that no individual driver has to personally shoulder the crushing long-term costs that can result from a car accident—and that every person hurt by a crash is able to recover a financial payout.
Liability insurance is one of the first types of personal auto insurance offered to Canadian drivers as early as the 1930s, when it became clear that drivers could cause serious injuries and property damage. Today, it’s the foundation of all personal auto insurance policies in Canada.
What does third-party liability insurance cover?
Third-party liability insurance covers:
- Medical expenses for other parties, including ongoing rehabilitation and attendant care costs
- Vehicle repair costs and other repair expenses for other parties
- Legal settlements
- Your own legal and defense fees if you’re sued
Third-party liability coverage protects you if you cause bodily injury or property damage to someone else. In most cases, the other person will file a claim through their own insurance, and the insurers handle the details between them. If you’re sued, your insurer can also cover the legal costs, up to your liability limit.
It’s time for a little math. Let’s imagine you’re found legally responsible for a motor vehicle accident that resulted in a spinal injury that paralyzed the other driver. The crash also totaled their vehicle—and because you’re at fault, your third-party liability insurance is on the hook for everything.
- Medical costs: A recent study puts the lifetime cost of a spinal injury in Ontario between $335,000 and $475,000.
- Property damage costs: The average value of a vehicle in Ontario is around $35,000 for used cars and $65,000 for new cars.
- Legal costs: If the other driver sues you for pain and suffering associated with the injury, the final settlement could be $500,000 or more. Court filing fees and attorney’s bills could total $10,000–$25,000.
The grand total: A hypothetical $880,000 to $1 million for a single accident. While this is just one example of a severe claim, it’s important to understand just how much liability insurance needs to cover in the event of a major crash.
What third-party liability insurance does not cover
Third-party liability insurance generally won’t cover:
- Any of your medical or repair costs: Accident benefits will cover your medical bills and related costs, while collision coverage (and, in some cases, direct compensation property damage) can cover your repair costs if your vehicle’s damaged in a crash.
- Anything above your policy limits: In the example above, your total liability costs after an at-fault accident exceeded $800,000. If you only carried Ontario’s minimum third-party liability insurance with a limit of $200,000, you’d be responsible for the remaining $600,000 out of pocket.
- Damage you caused intentionally: Intentional property damage or injuries caused while driving a vehicle fall under the category of criminal action and won’t be covered by third-party liability.
Check your car insurance policy for any other exclusions that may apply to your third-party liability coverage.
How third-party liability insurance works in case of an accident
Let’s explore how third-party liability insurance works out in practice in the case of a car accident.
Michael and Samira’s vehicles are involved in a rear-end collision on their morning commute. Both cars are damaged, and Samira sustains a neck injury, while Michael has a broken rib.
- First-party benefits cover immediate medical bills: Because both Michael and Samira have mandatory first-party accident benefits, their initial medical expenses not covered by OHIP (e.g., physiotherapy and mental health counseling) are covered by their own insurance companies. They don’t have to wait for a fault determination to use this coverage.
- Insurance adjusters determine fault: In the meantime, both insurance companies will assign claims adjusters to evaluate the events of the crash using Ontario’s Fault Determination Rules. Based on these rules, the adjusters agree that Michael was 100% at fault and Samira was 0% at fault for the accident.
- Third-party liability kicks in: At this point, Samira’s auto insurance provider can turn to Michael’s to recover any remaining costs, such as ongoing medical expenses and a settlement for pain and suffering if Samira chooses to sue. If Samira does file a lawsuit, Michael’s insurance company will cover his legal fees up to his policy’s limits.
Your third-party liability insurance could also cover your legal responsibility in the following scenarios:
- You crash into the side of a building, damaging a small business’s front window. Your insurance company will cover the cost to repair the window and any other related repair costs reported by the business owner, up to your policy’s limits.
- Your car slides on an icy patch and into a highway guardrail, damaging the rail. Your insurance company will cover the cost to repair the guardrail, up to your policy’s limits.
- You hit a cyclist in foggy conditions, causing a broken leg and concussion. Your insurance company will cover any medical bills not covered by the cyclist’s first-party benefits (up to your policy’s limits), and will shield you if they decide to sue.
Is third-party liability insurance mandatory in Canada?
Yes, third-party liability insurance is mandatory. Each province and territory sets its own minimum requirements for third-party liability insurance, whether it’s provided through a public auto insurance plan (as in British Columbia, Manitoba, and Saskatchewan) or purchased through private insurance companies.
The minimum limit for third-party liability insurance in most provinces and all territories is $200,000.
* Third-party liability is provided by a public automobile insurance plan.
But minimum liability insurance isn’t enough. While provincial and territorial laws set the minimum threshold for third-party liability coverage limits, rising medical and legal costs mean that even the $200,000 required in most parts of Canada—or the $500,000 minimum in Manitoba and Nova Scotia—isn’t enough for most drivers.
How much third-party liability insurance do you need?
Most insurance professionals in Ontario recommend carrying at least $1 million of third-party liability insurance, and $2 million or more if you:
- Carpool or share your vehicle frequently
- Drive in the U.S. on a regular basis
- Live and drive in an area with heavy traffic or inclement weather patterns
Raising your liability limits typically doesn’t add significantly to your overall insurance premiums, so it’s a cost-effective way to increase your coverage without putting an undue burden on your finances.
Minor car accidents are common; most Canadian drivers will get into at least one fender bender at some point in their life. Most drivers will also recover quickly from these accidents, both physically and financially.
Major car accidents are less common, but the costs associated with them can redirect the entire course of your life. They’re also not always caused by bad drivers: bad weather, fatigue, unavoidable distractions like children or other passengers, and momentary human lapses in attention and judgment can lead any driver to cause a catastrophic at-fault accident.
Third-party liability insurance is the last-resort safety net that stands between you and the life-altering financial costs associated with a major at-fault crash. When choosing your coverage limits, don’t think about the cost of a minor collision; think about the coverage you’d need to weather a severe crash.
Still not sure how much third-party liability insurance to carry? When you request auto insurance quotes with PolicyMe, a licensed insurance advisor can help you review your coverage options and offer personalized recommendations based on your overall financial situation and risk factors.
FAQ: Third-party liability insurance
This article is for general information only and is not insurance or legal advice. Examples and any sample quotes or rate ranges are illustrative and do not constitute an offer or guarantee of coverage, price, or eligibility. Actual coverage, discounts, and premiums depend on your individual circumstances and the insurer provider; if there is any discrepancy, your policy and insurer documentation govern. For advice about your situation, speak with one of our licensed insurance professionals.