Canada: How Much Car Insurance Do I Really Need? – Third Party Liability

Last Updated: October 18 2018
Article by Adam Wagman

Every mistake has a cost. Small errors may cost you the time it takes to correct them. Perhaps they'll cause you some embarrassment. It may cost you a bit of money if you need to pay to fix or replace an item you inadvertently damaged.

As the scope of a mistake gets bigger, so do the costs and consequences. For example, if you are involved in a serious car accident and are found to be partially or totally at fault, it can cost a lot of money to pay for the injuries and damages caused by your mistake. That is why we all must have car insurance if we own a car. Mistakes happen. But we need to take reasonable steps to make sure that those mistakes don't financially cripple our families.

In this blog post I explore third party liability (TPL) insurance and explain why failing to choose the appropriate coverage for you and your family is a mistake you don't want to make.

What is third party liability insurance?

Third party liability insurance (TPL) covers you, and others who drive your car with your permission, if claims are made for damages caused to someone else (the third party). These include claims for damage to property, bodily injury or death.

TPL is a part of the standard insurance policy that all owners of "automobiles" (including cars, trucks, motorcycles, snowmobiles, etc.) in Ontario must hold. The Ontario automobile policy includes a mandatory minimum of $200,000 in TPL coverage, but that minimum is not enough. In fact, the vast majority of people carry at least $1,000,000 in TPL coverage. As discussed below, you really should ask your insurance company or your broker to increase that limit to an amount that is appropriate for you and your family. In addition to any damages sustained by a third part, TPL covers the cost of the insurance company hiring a lawyer to defend the claim brought against you. That means if you are found to be at fault for an accident and are successfully sued for damages, TPL will pay for those damages, only up to the amount of coverage you have in the policy, in addition to the legal costs incurred for defending the claim.

It is important to understand that the TPL doesn't just cover the claims of strangers. Passengers in your vehicle, including family members, may need to sue if the driver of your vehicle causes them to suffer damages. You might even need to bring a claim against your own TPL if you are injured as a passenger in your own vehicle!

What other coverage do I have?

All Ontario vehicle owners must have an insurance policy that provides three other types of mandatory minimum coverages. The first type, called accident benefits, are outlined in the Statutory Accident Benefits Schedule (SABS). These benefits, also called "no-fault benefits," include income replacement, attendant care, medical and rehabilitation expenses, and other benefits up to certain maximum amounts, and subject to many rules and restrictions. Those benefits are available to you and your family members covered by the policy, and potentially others involved in an accident with your vehicle, regardless of who is found to be at fault for the accident.

Unfortunately, in the past few years the Ontario government has drastically reduced the amount of no-fault benefits coverage in the standard auto policy. In a future blog post I'll further explain changes to SABS and what kinds of additional optional benefits you should consider purchasing to protect yourself and your family in the face of these government-imposed reductions.

The second type of mandatory coverage, direct compensation property damage, covers damage to your vehicle and certain property in your car if you are involved in a collision in Ontario with at least one other insured vehicle, and you are not fully at fault.

Finally, the third type of mandatory coverage that all vehicle owners in Ontario must have in their policy is called "Uninsured Automobile Coverage." This type of coverage protects you if you are involved in an accident with an unidentified vehicle (for example, a hit and run accident) or with an uninsured driver who causes vehicle damage, bodily harm or death to you or a family member. This uninsured coverage is available to a maximum of $200,000.

While every owner of a vehicle must have all of the mandatory coverages, there are many additional optional coverages that responsible owners should consider purchasing.  Generally speaking, those optional coverages are relatively inexpensive. While no one expects something bad to happen to them, the reality is that you probably know someone who has been involved in a serious accident. The mandatory coverages, combined with some additional optional coverages, can mean the difference between financial security and financial ruin for your family.

What is the Family Protection Endorsement?

People can (and should) buy optional coverage or endorsements to improve their standard auto insurance policies. These endorsements provide important extra coverage and protection.

One type of optional coverage everyone must consider purchasing is called the Family Protection Endorsement. In fact, most insurers or brokers will add it on to your policy even if you don't ask – it's that important.

This part of the policy provides protection if you (or certain family members) have been hurt as a result of the negligence of an "underinsured" or unidentified driver. A driver is considered "underinsured" if their insurance limits are less than the limits of your Family Protection Endorsement. For example, if you and your family are involved in an accident and suffer $500,000 in damages, but the at-fault driver has only $200,000 in TPL coverage, you would only be able to collect $200,000 from that driver's insurance company. However, if you have a Family Protection Endorsement for $1,000,000, you could recover the otherwise unpaid $300,000 owing, from your own insurance company. This is vital protection for you and your family.

It is important to understand that the limit of your Family Protection Endorsement is usually the same as the limit that you choose for your TPL. So, if you choose to purchase a lower amount of TPL, you will also be purchasing a lower amount for the Family Protection Endorsement. This begs the question – how much is enough?

How much is enough?

Two hundred thousand dollars ($200,000) sounds like a lot of money, because it is a lot of money in many circumstances. Unfortunately, when it comes to serious, debilitating and catastrophic injuries or deaths from motor vehicle accidents, or even modest injuries and damages, this amount of coverage is exhausted very quickly. If there are multiple people involved in the accident, the situation is even worse. In short, $200,000 is not enough insurance for anyone to carry. Remember, you are personally responsible for any damages that you cause above your insurance limits. If the claims against you are worth more than the coverage you have purchased, the victim(s) can sell your home or other assets. They can garnish your wages. They can force you into bankruptcy.

Most people in Ontario have $1,000,000 TPL, which means that they also have $1,000,000 coverage for the Family Protection Endorsement. That amount used to be enough for most people, but unfortunately that is no longer the case. One important reason for this is the recent reduction in available accident benefits. Your TPL is meant to cover any damages and losses that haven't already been paid to the victim by other available insurance, including accident benefits. Every victim used to have $172,000 in benefits to cover medical treatment, rehabilitation and care. If a victim was catastrophically injured, they used to have $2,000,000 in coverage for those expenses. Those available benefits meant that TPL of $1,000,000 was usually enough to cover the victim's additional losses and damages.

The Ontario government has reduced those benefits for most victims to only $3,500! In some cases, that can be increased to $65,000; still far less than the $172,000 that used to be available. For those with catastrophic injuries, the benefits were cut in half, down to only $1,000,000! What that means in practical terms is that those who make a mistake and cause an accident are now potentially on the hook for way more damages than they were when the benefits were at higher levels.

As a result, insurance experts generally recommend having $2 million in TPL. Anyone with significant assets should consider purchasing an "umbrella policy" in conjunction with their home insurance for $5 million. Surprisingly, the difference in cost between a $1 million policy and a $2 million policy is not significant. Further, the added benefit is that you then have the higher limit for your Family Protection Endorsement. By purchasing this extra coverage, you actually protect your family twice.

If you're on a tight budget, you may be tempted to pay less per month in order to maintain the bare minimum required by law. But this could cost you greatly if you're ever in a serious accident. If at all possible, consider spending the few extra dollars that will protect you properly. Rather than focusing on the small difference in the cost of your insurance premium, think about the value of this extra protection and what it could be worth to you and your loved ones. How much is peace of mind worth to you? Mistakes do happen, and we urge you to protect yourself and your family.

Hopefully you will never be involved in an accident. Hopefully you will never have a lawsuit filed against you for causing an injury to someone else. Hopefully you and your family will never sustain serious injuries in a car accident. But if, by chance, you are faced with this unfortunate event, you'll be glad you paid a little more in insurance premiums to protect yourself with this necessary extra coverage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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