Is third-party car insurance worth it? Here’s the honest truth

Image: iStock/Bilanol

Australian car owners are increasingly downgrading their insurance policies from comprehensive to third-party cover, but experts are warning drivers to carefully consider their needs before making the switch.

According to an April 2024 Finder survey of 961 Australian motorists, 16 per cent of drivers reported cancelling or lowering their car insurance policies between 2023 and 2024.

Almost one in 10 respondents revealed they didn't have cover beyond compulsory third-party insurance, while another 11 per cent said they downgraded their policy to save money.

"As a financial counsellor myself, we’ve seen it for a long time with people experiencing financial hardship – insurance is one of the first things to go because it's a 'just in case' type expense," explains Vicki Staff, National Coordinator for Disaster Recovery for Financial Counselling Australia (FCA).

"Unfortunately due to the inflationary crisis over the last couple of years, that behaviour has accelerated."

So when should you opt for third-party insurance over comprehensive cover? And what are the benefits and downsides of downgrading your car insurance coverage?

There are two main types of third-party insurance coverage: Third-party property and third-party fire and theft.

"Third-party property covers damage to other people's vehicles or property if you're responsible for an accident," explains a spokesperson from the Insurance Council of Australia (ICA).

Meanwhile, third-party fire and theft, "Covers fire or theft of your own vehicle, plus damage to others’ vehicles or property in an accident."

It's wise not to automatically assume your third-party insurance policy includes fire and theft coverage.

"Fire and theft cover can be separate or an add-on, but if your policy does cover fire and theft it will say as much," explains Peta Taylor, car insurance expert at Finder.

"Third-party property and third-party fire and theft cover should not be confused with compulsory third-party (CTP) insurance," an ICE spokesperson explains.

"CTP is a mandatory insurance and covers injuries arising from motor vehicle accidents (not property damage)."

CTP is the most basic form of insurance available and is mandatory in all states and territories of Australia.

The only difference is that in some states it is a cost rolled into your registration, while in other states you have to organise it separately.

While third-party car insurance only covers damage you cause to other people's cars and property, comprehensive covers this as well as damage to your own car if you're in an accident – regardless of who is at fault.

"[Comprehensive insurance] also covers theft, as well as damage from storms, fire, and floods. Some policies may even cover the cost of a hire car after an accident," the ICA spokesperson explains.

If you're in an accident and you're not the at-fault driver, there are a couple of potential scenarios you may face.

"A benefit feature that only some third-party policies have is called the uninsured motorists benefit, which typically covers for up to $5000 in damage," explains Taylor.

"That means if somebody hits your car, they're at fault and they're also uninsured, as long as you can provide all the relevant details to your insurer, they will cover you for up to $5000 of the damage caused. However, not every third-party property damage provider covers it, so there's a benefit to be gained from reading the fine print."

If this isn't an option, your next hope is that the driver who hit you has the necessary insurance coverage.

"If someone hits your car and they're at fault and they've got their own insurance, they should go through their insurer to claim [the cost of repairs]," Taylor says.

"If they've hit your car and they don't want to claim through their insurance or are just being really difficult, you either have to cop it [the damage costs] and move on or take legal action."

The biggest risk of opting only for third-party insurance is that you may not be able to afford or replace your car in the event of an accident.

"If you’ve got an old car and you think the value of the car is too small [to bother with insurance], ask yourself: do you have the rainy day savings to be able to purchase an entirely new vehicle if required?" Staff says of the risks associated with third-party insurance.

Both Taylor and Staff say many car owners also don't consider the risks of under-insuring a vehicle that has finance owing.

"Not having adequate insurance while your car is under finance is a big risk.  In the worst-case scenario where your car is written off, you can end up with no vehicle and a big debt to repay," Staff says.

"People often overlook finances owing on a car," says Taylor, adding: "If you write off your car without comprehensive cover, you're still facing everything you owe on that lease plus interest.

"Say I paid $35,000 for my car with finance, but the market value when it's written off is $25,000, but I still owe on the $35,000, I'll be $10,000 short."

To safeguard yourself, Taylor recommends opting to insure for an agreed value that takes into account what you owe, rather than market value.

"If you have a car on finance insure it for agreed value, not market value, and then you'll know what you’ll be out of pocket for [if it's written off]," Taylor explains.

One last issue to consider is cover for the unexpected circumstances and costs that can often accompany a car accident, which comprehensive cover will often provide.

"Weather events are a big one – storms and floods and hail, the damage that can come from that [isn't covered]," says Taylor.

"Also, [you won't get] hire cars after theft or after an accident where you’re not at fault, or personal effects coverage. Plus any emergency transport or accommodation [won't be covered] – so if you're far from home and need a cab back home."

Third-party car insurance can be a great affordable insurance option as long as you're prepared for the consequences.

"It really comes down to how valuable your car is and whether or not you can get around without it or afford to replace it," Taylor says.

"Third-party is good for covering the damage you cause as long as you're at peace with not being covered for damage to your car."

Where third-party insurance can be inferior to comprehensive insurance is if you're someone who needs your car for work.

"It really comes down to how much somebody is relying on their car to earn an income," says Staff.

"If they are relying on their vehicle to earn an income then there’s much greater risk in reducing your coverage."

Additionally, you may face higher costs from the flow-on effects of an accident – like hiring a rental car or arranging temporary accommodation – that can sometimes be covered by comprehensive insurance.

Susannah Guthrie has been a journalist for over a decade, covering everything from world news to fashion, entertainment, health and now cars. Having previously worked across titles like The New Daily, Elle, Harper's Bazaar, People Magazine and Cosmopolitan, Susannah now relishes testing family cars with the help of her husband and three-year-old son.

Read more about Susannah Guthrie