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Third-party liability coverage is the portion of an insurance policy that protects you if you’re held legally responsible for a physical injury or damage to someone else’s property. Also referred to as “legal liability coverage,” this section of your policy is set up to cover things like legal fees, the amount of money you have to pay to settle a lawsuit, and other related expenses (like loss of income if you have to take the day off to go to court, for example) up to the limits in your policy.

So, how does liability coverage work in real life? And why is it so important? We’ve got the answers to these questions and more.

How does third-party liability coverage work?

Here are a few examples of real-world scenarios that could be covered by the third-party liability section of your home insurance policy or car insurance policy:

Home insurance liability coverage

You’re cutting down a tree in your yard and it accidentally falls and crashes through your neighbour’s window.

You’re golfing in Florida and drive your rental golf cart over someone else’s set of professional clubs.

On a family fishing trip up north, your son steers your boat into someone who is waterskiing nearby, injuring the person and damaging their water skis.


Auto insurance liability coverage

You hit a patch of black ice while pulling into your driveway and knock over your neighbour’s fence with your car.

You’re backing out of your friend’s driveway and accidentally back over their new custom-made mailbox.

You accidentally back your car into your local coffee shop’s patio furniture, which runs into and breaks another customer’s ankle in the process.


Bonus tip: Did you know that the liability coverage included in your home insurance policy tags along with you, no matter where in the world you are? Learn more about how liability coverage can protect you at home and abroad.

Why is third-party liability coverage so important?

Accidents happen, even when you take all the right steps to prevent them — and accidents often result in lawsuits that can have serious financial consequences. All of the scenarios we’ve listed in this post are examples of times when you could be held legally responsible for injuries or damage to other peoples’ property. Liability coverage ensures you won’t get stuck paying out of your own pocket when the unexpected happens.

If I have liability coverage in my home insurance policy, does it cover me when I’m driving, too?

No. When you’re operating a vehicle, liability for injuries or damage to other peoples’ property is not covered by your home insurance policy — so you’ll need to carry enough liability coverage on your car insurance policy to protect you in case of a driving-related mishap.

How much liability coverage should I have?

You should buy enough liability coverage to protect your financial security. Once a claim has exceeded the limit in your policy, you’ll be responsible for paying the remaining balance — which, depending on the severity of the situation, could lead to financial trouble or even bankruptcy. The more liability coverage you have, the less you’ll have to pay out of pocket if you’re involved in a lawsuit. Here are a few tips to consider when deciding on your liability limits:

Home insurance liability coverage
  • Many home insurance companies require you to have a liability limit of at least $1 million. While this may be enough to cover most typical liability claims, many claims do exceed $1 million, especially when there are long-term injuries involved.
  • Consider a higher limit if there’s anything on your property that could increase the chances of someone getting hurt (a swimming pool, a swing set, or pets, for example).
  • If you have a home-based business that’s insured through an endorsement on your home insurance policy, make sure your liability limit is high enough to protect you in the event that your business activities result in a lawsuit.
Auto insurance liability coverage

Increasing the liability limit on your car or home insurance policy may cost less than you think, so it’s worth contacting your broker to find out how much it would cost to take your coverage to the next level.

What if I don’t get sued but I’m still responsible for an injury or damage to someone else’s stuff?

While it’s not technically “liability coverage,” your home insurance policy may include coverage for voluntary payment when you’re responsible for an injury or damage to someone else’s property but not being sued. For example, if you borrow your friend’s designer gown and accidentally stain it with red wine, you can volunteer to replace it; or if you hit your buddy in the teeth when you’re playing road hockey, you can volunteer to cover his dental bills — and your insurance company can cover the cost. Ask your broker for more details about coverage for voluntary payment for medical expenses or damage to property.

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