Liability insurance demystified: What it is, coverage, types and more

Liability insurance is one of those terms you hear all the time in the insurance world, but what does it really mean and how does it protect you? Here, we'll break down everything you need to know about this important insurance coverage. 

Liability insurance protects you against financial losses if you're deemed liable (that is, responsible) for causing damage or injury to another person or their property. You might also hear it called third-party liability, personal liability or civil liability insurance.  

There are two main kinds of personal or third-party liability insurance. The first is included in your private automobile insurance coverage. It's required if you own or lease a vehicle and want to legally drive it in Canada. Liability insurance is the bare minimum coverage you need if you have a car. 

The other type is included with your home insurance, renters insurance or condo insurance. Technically speaking, this kind of liability insurance is optional (unless you co-own a building in Quebec). But while it might not be required by law (like it is for auto insurance), condo corporations or landlords may require it. Plus, it offers financial protection and peace of mind.

Liability insurance in Canada typically covers your legal defence costs. It also covers damages you may owe if you're found to be at fault (another insurance term for “responsible”) for causing unintentional bodily injury or property damage to a third party. 

That’s a lot of legal terminology, but basically, if you unintentionally hurt somebody or damage their property, it could cover your lawyer's bill and any amounts you're found to owe that other person.

Since liability insurance is designed to protect you from sudden and accidental events, it doesn't cover damages or injuries that are found to be intentional (like an argument that escalates into a fight) or the result of criminal acts. 

The liability coverage that comes with your car insurance policy helps cover the cost of damages to the other person's property as well as injuries that aren't covered by a public insurance plan. 

For example: 

• You rear-end the vehicle in front of you, and the driver is injured. You may not have to pay out of pocket for medical expenses, legal fees or compensation to the injured third party if they decide to sue, provided the total costs are within your automobile policy limits.

• You skid off a slippery road on your way home, damaging someone's fence. Your auto liability coverage could kick in to help pay to repair the fence.

The liability insurance included with your car insurance policy protects you only when you’re driving in Canada and the United States. If you’re elsewhere in the world (including Mexico), you’ll need to take out insurance locally. And be aware that certain limitations apply if you’re driving outside of your home province.

Liability-only insurance, also known as “one-way insurance,” typically refers to a type of auto policy that includes only the liability coverage described above. Nothing else. That means that if you're responsible for a collision, it could cover damages and injuries you cause to other people and their property (up to your policy limits) but not damage to your own vehicle.    

When you talk to your insurance company about purchasing home, tenant or condominium insurance, liability insurance will be part of that policy. It could cover you for unintentional bodily injury or property damage caused to a person who doesn't live with you.

Here are some examples of situations where liability insurance could come in handy:

• A guest slips and falls on the icy walkway up to your house and breaks their wrist. Your liability insurance could help cover the costs if they decide to sue. 

• You collide with a jogger while biking to work or accidentally injure someone while skiing. Even though the accident happened away from your home, the liability coverage on your policy could still help keep you covered.

When it comes to auto insurance, minimum coverage amounts vary from $50,000 to $500,000, depending on where in Canada you live. Although minimum coverage amounts vary across the country, at least $1 million in liability coverage is typically offered.

When it comes to home insurance, the standard minimum coverage amount offered for liability insurance is $1 million. It’s often possible to take out a higher amount, however, to help protect against the financial consequences of costly lawsuits and legal proceedings. Additionally, provincial regulations may require higher coverage for certain risks.    

The liability coverage on your home insurance policy generally follows you wherever you go, whereas the liability coverage on your auto policy will typically only protect you in Canada and the United States.

This means that if you forget to turn off the tap at a vacation home in Mexico, for example, the cost of the damage could be covered if the owner of the rental property decides to sue. Or if you're found to be at fault for a collision on a road trip in California, the liability coverage on your auto policy will kick in to help pay for your legal costs if the person you hit files a claim against you.

The key takeaway here is that it's important to choose an amount of liability insurance that is suited to your needs. This will give you peace of mind and protect you from the financial consequences of any bodily injury or property damage you may unintentionally cause to another person. That means it’s a good idea to take a few minutes to review your coverage and assess your individual needs. 

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The information on this page is provided for informational purposes only. The terms and conditions of the coverages described are set out in the insurance policy, which always prevails. Certain conditions, exclusions and limitations may apply.