How Car Insurance Works

Everything you need to know, from finding the right coverage
to filing a claim.

Car insurance made simple!

At first glance, car insurance appears intimidating. Policies are full of legal jargon and can be hard to understand, especially if you are new to driving, or new to Canada. This guide covers the basics and we hope it helps you to understand how car insurance works.

Car insurance and the law in Canada

The law is clear. Every Canadian vehicle owner must have auto insurance in order to operate your vehicle. It is compulsory in all territories and provinces. If you are caught driving without insurance, your license can be suspended, your vehicle can be confiscated, and you will face a hefty fine.

In Ontario, for example, fines range from $5,000 to $25,000 for a first offence. You must also pay a 25% victim fine surcharge (e.g. an extra $2,500 if you receive a $10,000 fine). For a second offence, fines can be up to $50,000.

Even if you get lucky and escape with a fine on the lower end of the scale, your future insurance premiums will increase dramatically.

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Car insurance coverages

Mandatory coverages:

Each province has its own rules and regulations when it comes to mandatory coverage, but there are some commonalities. All Canadian car insurance policies must include the following:

  • Third-Party Liability (TPL) - If you are responsible for an accident in which someone is injured or killed, or their property is damaged, TPL will help cover the cost of lawsuits against you up to your coverage amount. The minimum amount of required coverage is $200,000, but most drivers opt for at least $1 million. In Ontario, Quebec, Nova Scotia, New Brunswick and Prince Edward Island, TPL contains a component called Direct Compensation - Property Damage (DCPD). If you are in an accident where you are deemed not-at-fault, DCPD coverage means your insurer will pay for repairs, without having to recover damages from the other driver.
  • Uninsured Automobile - This protects you financially in the case of death or injury caused by an uninsured driver or as a result of a hit-and-run by someone else. It also covers damages to your vehicle by an identified uninsured driver. Uninsured automobile coverage is mandatory across Canada.
  • Accident Benefits (AB) – This coverage is mandatory everywhere except for Newfoundland and Labrador. If you are hurt in an accident, this coverage will pay for income replacement, medical treatments, and even funeral costs should you succumb to your injuries, regardless of who is at fault.

Optional coverages:

While third-party liability, uninsured automobile, and accident benefits insurance are mandatory across the country, there are many optional coverages that you can add to your policy to increase your coverage for an additional cost.

The most popular optional coverages are collision and comprehensive insurance. In fact, they are mandatory in Saskatchewan and Manitoba, and usually required by the lender (such as a bank) if you have taken out a loan to pay for your car in any other province.

  • Collision Coverage – This pays for repairs if you collide with another vehicle or object, even if you are at fault or someone else was driving your car. If your vehicle is damaged beyond repair, collision coverage will help pay for a replacement.
  • Comprehensive Coverage – This covers the cost of repairing damage caused by vandalism, theft, fire, natural disasters and other hazards, even when your car is parked and unattended.
  • Specific Perils Coverage - This protects you financially from specific perils identified in your policy (e.g. fire, earthquake).
  • All Perils Coverage – This is the broadest coverage available. It includes both collision and comprehensive coverage.


You can add endorsements to your policy to enhance your coverage. Some of the most popular endorsements are outlined below:

  • Loss of Vehicle Use - This covers transportation costs if you are in an accident, and your vehicle is temporarily unavailable due to repairs.
  • Damage to Non-Owned Vehicle - This covers you in case you cause damage to a vehicle that you rent.
  • Depreciation Waiver – This is recommended if you have a brand new car. It ensures you receive the full value of your vehicle following a write-off.
  • Family Protection – This comes into play if you're involved in an accident with a driver who has no insurance, or less coverage than you and not enough for your claim.
  • Accident Forgiveness – This endorsement is offered by some insurance companies. If you buy it, they won't count your first at-fault accident against you.

How much coverage is necessary?

Aside from choosing which coverages to include in your policy, you also have to decide how much coverage you will need. Each province has a minimum required amount, but it’s not always enough. When deciding how much you will need, consider the value of your car, and the financial consequences of a serious accident.

Given the vast amount of auto insurance coverage options available, it is important to do your homework ahead of purchasing a new policy to ensure you have the appropriate coverage types and limits. You're encouraged to shop around and use our free car insurance comparison service to get several quotes tailored specifically to your needs.

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Car insurance claims

No one ever wants to end up in a situation resulting an insurance claim, but unexpected situations do occur and it's good to know what you can expect.

What to do after a car accident

If you're involved in a car accident and someone is injured or there is property damage over the provincial limit, the police must be notified. For serious accidents involving a fatality, criminal activity or damage to public property, police will arrive on the scene. For less serious accidents, and assuming your car is safe to drive, some cities have Collision Reporting Centres where a police officer can inspect the damage to your vehicle within 24 hours.

Immediately after an accident happens, it is important to follow these rules:

  • Stay at the scene.
  • If safe to do so, move your vehicle out of traffic to avoid injury or further damage.
  • Record the location, time of day, weather conditions, visible damage and any other details you think are relevant to the accident.
  • Collect information from the other driver, including their name, address, licence number, insurance company name and policy number.
  • Obtain contact information from eyewitnesses, as well as the name and badge number for the police officer that attended the scene.
  • Take pictures of the damage to your vehicle and any others involved in the accident.
  • Take pictures of the surrounding area, noting any property damage resulting from your accident.
  • Notify the police.
  • Report the accident to your licenced auto insurance representative.

You’ll want to report the incident to your insurance company as soon as you can, regardless of who you think was at fault. The insurance company will assign someone to handle your claim.

What to do if your vehicle is damaged

If your vehicle has been damaged, the type of compensation you receive will depend on whether you're found to be at fault, and the type of coverage you have.

At fault

Whether or not you're found at fault will depend on the assessment done by the insurance company. Outcomes are based on a set of Fault Determination Rules, covering dozens of types of accidents. You can be found anywhere from 0% to 100% at fault; anything above 25% will likely lead to a rate increase.

Insurance companies assign fault without input from the police. You might not have broken any laws, but could still be at fault for an accident. Likewise, a ticket from a police officer does not always mean you'll be found to be at fault by the insurance company.

If you have collision coverage and are involved in an accident where you're found to be at fault, you'll be covered up to the policy limit, minus your deductible. If you do not have collision coverage, the insurance company will not cover any repair costs.

Not At Fault

Things work differently when you're found not at fault. If you have Direct Compensation - Property Damage Coverage (mandatory in Ontario), you will be covered up to your no-fault percentage of the policy limit, even if you don't have collision coverage.

If you're involved in an accident with a motorist who's not insured, you can make a claim for the damages to your car under the Uninsured Automobile coverage portion of your policy, as long as the person can be identified.

If your vehicle has been damaged, the insurance company will decide whether to cover the cost of repairs, or if the damage is serious enough to completely write it off. In a write-off, you receive the cash value of your car at the time of the accident.

For repairs, your insurance company will provide a list of their preferred body shops. You can choose your own, but if issues arise with the repair work, you will have to sort it out yourself. Do not get any repairs done until the insurance company has had a chance to review your claim and authorize the work.

What to do if you are injured

If you've been injured in a car accident you may be entitled to accident benefits, regardless of who’s at fault. Keep hold of all doctor’s notes, prescriptions, and other supporting evidence. Your insurance company will tell you what else they need to process the claim.

Non-accident related claims

If your vehicle is damaged in a non-accident circumstance (e.g. vandalism), compensation will depend on your coverage. If you have comprehensive, all perils, or specific perils coverage, you will be covered up to your policy limit, minus your deductible. This also applies if your car is stolen, but the belongings in your car are not always covered.

When might a claim be denied?

It is important to note that regardless of the coverage you have, an insurance company will likely deny your claim if any criminal behaviour was involved, including the following circumstances:

  • Accidents resulting from the influence of drugs or alcohol.
  • Accidents that result in a criminal conviction (e.g. hit-and-run or criminal negligence).

Contrary to popular opinion, your premium will not go up due to you making a claim. However, if during the claims process you are deemed to be at fault, your premium could increase. Making lots of claims can result in the insurance company increasing your deductible or, in more extreme cases, discontinuing your coverage.

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Comparing Quotes with RATESDOTCA

For more information on car insurance in Canada, check out our catalogue of auto insurance guides. If you need specific information on your province, learn more about auto insurance in Ontario and Alberta.

Every driver has different requirements when it comes to car insurance, but we all need affordable premiums with adequate coverage, and this is where RATESDOTCA can help. In just a few minutes, you get multiple quotes in one place. Easily compare prices and coverages, and secure a great deal on car insurance today.

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