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What is auto insurance and why do I need it?

Watch our 3-part video on the basics of auto insurance
(Total Time: 1 min 28 sec)

Auto insurance is something the vast majority of us don’t think to question because it’s simply a requirement if we want to drive a vehicle.

Even though we accept the fact that driving and having auto insurance go hand in hand, there may be times when we wonder about the logic behind auto insurance. What it’s for and why is it so important that we have it?

What is auto insurance?

Auto insurance is a contract between you and an insurance company. In layman’s terms, here is what this contract states. If you get into a car accident and are either injured or liable for someone else’s injuries and/or property damage, the insurance company will pay for the damages (up to a maximum amount predetermined by your selected policy limits).

Each province has its own laws governing the minimum coverage you must have in order to legally drive a motor vehicle. In fact, every province has a minimum coverage amount of $200,000 except for Nova Scotia which is $500,000 and Quebec which is only $50,000.

Quick history

Auto insurance dates back to the early 1900s. It replaced “financial responsibility bonds”. Once people came to an understanding of the level of damage an automobile was capable of, auto insurance was created by the government. This was done to ensure innocent people were not put in unjust situations as a result of someone else’s negligence or operation of a motor vehicle. Auto insurance companies each have their own pool of funds comprised of the insurance premiums collected from their clients. When an insured person files a claim, they use the money from these pools to cover their individual losses.

Auto insurance today

Now, auto insurance is part of the vehicle registration process which means you cannot register your car or get license plates without having and showing proof of insurance. Penalties for driving without insurance are high and can result in a ticket (minimum $5,000), car impounding and even license suspension.

The Compulsory Automobile Insurance Act was passed in 1990 which says:

The Compulsory Automobile Insurance Act (CAIA) requires an operator of a motor vehicle to carry an “insurance card” to prove that he/she is insured under a contract of automobile insurance.

Section 1 of the CAIA sets out the authority of the Superintendent of Financial Services to approve an “insurance card”.

If you find yourself in a situation where you are on the receiving end of a charge for operating a motor vehicle without insurance, it can be very difficult to obtain insurance afterwards. In such a case, insurance companies would consider you to be a high-risk and irresponsible driver.

Why do you need auto insurance?

If you’re willing to take a risk, at first glance auto insurance may seem like an expense you can bypass in order to save on monthly payments. But what happens if you do get into an accident and cannot pay out of pocket for the damages you’ve caused to yourself or someone else?

Auto insurance protects you financially if you injure yourself or another person. It shields you from third party lawsuits. It also protects you in the event that you damage someone else’s property (i.e. another car, government property on the road, building, etc.). And not only does it protect the person who causes the damages, but also the innocent person who sustains losses as a result of an accident.

Different coverages

When you’re setting up your automobile insurance policy, here are a few important elements to be aware of:

  • Third Party Liability (mandatory) – this is what protects you financially if you injure someone else or their property
  • Accident Benefits (mandatory) – this protects you financially if you injure yourself and incur certain expenses as a result of an accident (i.e. rehabilitation expenses, massage therapy, loss of income if you cannot work, etc.)
  • Physical Damage (optional) – this coverage protects against damages to your own car from numerous situations (i.e. collision, theft, vandalism, natural disasters, floods, fire, falling objects, etc.)

Why is auto insurance important?

Understanding the necessity of auto insurance means acknowledging the fact that there are many people you share the road with. As a driver, it is essential that you have insurance to ensure the protection of everyone involved in the event of an unforeseen circumstance. It is, therefore, the law for you to have auto insurance in order to protect the wellbeing of anyone who suffers from the repercussions of an accident. And let’s not forget, auto insurance is also what gives us personal peace of mind on the road.

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