Should You Switch from Comprehensive to Third-Party Car Insurance? Experts Weigh In

As car insurance premiums continue to rise, more Australian drivers are considering downgrading their coverage from comprehensive to third-party insurance. But is this a wise move? Experts are urging car owners to carefully evaluate their needs before making the switch.

The Rising Cost of Car Insurance

According to a Finder survey conducted in April 2024, 16% of Australian motorists reported downgrading or cancelling their car insurance policies between 2023 and 2024. Nearly one in ten drivers revealed that they didn’t have coverage beyond the mandatory compulsory third-party (CTP) insurance, while 11% chose to switch to cheaper third-party insurance to save money.

This shift comes as car insurance costs outpace inflation, increasing by more than 6% year-on-year. As Vicki Staff, National Coordinator for Financial Counselling Australia, points out, insurance is often one of the first expenses to be cut during times of financial hardship, a trend that's accelerated due to recent inflationary pressures.

So, when should you consider opting for third-party insurance, and what are the pros and cons of downgrading from comprehensive cover?

What is Third-Party Insurance?

There are two main types of third-party car insurance:

1. Third-Party Property InsuranceThis covers damage to other people's vehicles or property if you're responsible for an accident.
2. Third-Party Fire and Theft InsuranceIn addition to covering damage to other vehicles or property, this type of cover also protects your own car in case of fire or theft.

However, not all third-party policies include fire and theft coverage. Peta Taylor, car insurance expert at Finder, advises drivers to double-check their policy details to ensure they have the coverage they need.

CTP vs Third-Party Insurance: What's the Difference?

It’s important to distinguish between CTP (Compulsory Third-Party) insurance and third-party insurance.

• CTP Insurance: Mandatory in all Australian states and territories, CTP covers injury claims resulting from a motor vehicle accident. It does not cover damage to vehicles or property.
• Third-Party Insurance: Covers damage you cause to other people's property or vehicles, but does not cover damage to your own car (unless you choose a fire and theft option).

Comprehensive vs Third-Party Insurance

Comprehensive insurance offers more extensive coverage compared to third-party insurance. Here’s a breakdown of what each type covers:

While third-party insurance covers damage to other vehicles and property, comprehensive insurance also protects your own car, regardless of who is at fault in the accident. Plus, comprehensive cover often includes additional perks, like hire cars and coverage for natural disasters.

What Happens if Someone Hits Your Car with Third-Party Insurance?

If you’re in an accident and the other driver is at fault, but they are uninsured, third-party insurance might still cover the damage to your vehicle. Some policies offer an uninsured motorist benefit that covers up to $5,000 for damage caused by an uninsured driver. However, not all third-party providers include this, so it's important to review your policy details.

If the at-fault driver is insured but doesn’t want to claim, you could either bear the cost of the repairs or pursue legal action.

The Risks of Third-Party Insurance

While third-party insurance offers savings, there are significant risks. The most notable one is the potential inability to replace your vehicle in case of an accident. Vicki Staff explains that if you have an older car, the value may be too low to justify comprehensive coverage, but you need to ask yourself: can you afford to replace your car if it's written off?

Additionally, if your car is under finance, not having comprehensive coverage can be especially risky. Peta Taylor highlights the danger of being stuck with both a debt and no car if your vehicle is written off without sufficient coverage.

"Imagine you still owe $35,000 on your car, but its market value is only $25,000. You’d be left with a $10,000 shortfall," Taylor says. In such cases, it's advisable to insure for the agreed value rather than the market value to protect yourself from this financial gap.

Is Third-Party Insurance Worth It?

Third-party car insurance can be an affordable option for some drivers, but it’s not without its trade-offs. According to Peta Taylor, it’s a good choice for covering damage you cause to other vehicles as long as you’re comfortable with not being covered for damage to your own car.

For drivers who rely heavily on their car, especially those who use it for work, switching to third-party insurance could pose a greater risk. Comprehensive cover offers protection against a broader range of incidents, including weather events, hire car costs, and more.

Conclusion: Should You Make the Switch?

If you’re considering switching from comprehensive to third-party insurance, carefully evaluate your needs and the risks involved. Third-party insurance can be a great budget-friendly option if you have an older car or if you can afford to replace your vehicle out of pocket. However, for those who depend on their car for daily use, or those with finance owing on their vehicle, comprehensive insurance may still be the better choice.

Ultimately, it comes down to understanding the value of your car and whether you’re prepared for the potential financial consequences of an accident without full coverage.