Assuming I have Irish car insurance, do I need to buy extra coverage when renting a car in Portugal?

Insurance from the Car Rental Company

Typically car rental agreements include insurance, which cover damages to the vehicle if used according to the terms and agreement. This doesn't mean that you won't pay anything if you damage the car. Indeed these often require the signatory to pay a non-waivable excess, regardless of the actual entity and value of the damage. Launching a random booking on the Portuguese Hertz website yields something that looks like this:

You can see that the rental price for 14 days include what is called Collision Damage Waiver which does exactly what I said. If you lawfully (from T&C point of view) damage a car, you won't have to pay more (or less) than the non waivable excess (value oscillating in the thousands of Euros depending on vehicle class). Quoting from the information pop-up:

Collision Damage Waiver is an optional* service which, if accepted, reduces your financial liability for damage to the Hertz vehicle, its parts and accessories except for theft, attempted theft or vandalism, provided the vehicle is used in accordance with the terms and conditions of the rental agreement.

Please note CDW cover is mandatory when renting a vehicle in group Luxury.

*CDW may be mandatory and included in some contract or preferential rates.

If CDW is declined, you will be responsible for the amount of the deductible – see table below.

In Madeira, if CDW is declined, you will be required to leave an additional amount on your credit card.

Regardless of whether CDW is accepted or included, all rentals are subject to a non-waivable excess for which you are responsible in the event of damage to the Hertz vehicle during the rental – see table below (please find a separate table for 2 Wheel Vehicles).

In the case of Hertz, you can purchase what they call a Super Collision Damage Waiver package which brings the excess down to something more in the order of hundreds of Euros or less, depending on vehicle class. The fee for this last package can be quite steep, especially if you add it upon picking up the car, as opposed to when completing the online booking.

Are there Any Alternatives?

Your Insurance Back Home

Whether the car insurance you have back home covers your rentals abroad is something to be verified with the insurance company. Some contracts might, depending on various factors including premiums, rates, etc. You'll have to bring this up with them and ask.

Dedicated (and Cheaper) Excess Collision Waiver Insurance

It is worthy to note that it is not uncommon for travellers to subscribe to excess collision waiver insurances with their providers back home. Indeed this webpage on Holiday Car Hire from The Guardian mentions a few companies offering (annual) excess policies, often for much cheaper than the one you can get from the rental agency. Quoting from the linked page:

3. Save £100 by buying excess insurance

When you rent a car, the price generally includes insurance cover for a major crash, write-off, etc, but leaves you with the bill for the first £500 to £1,000. If there are any small scratches or scrapes, adding up to, say, £500 worth of damage, it means you have to pay it in full. So the car hire firms try to persuade you into buying super CDW insurance to cover this first £500-£1,000. But they charge as much as £150 for a week, compared to the £33 cost of buying it independently.

Travel Insurance or Credit Card

This tips and tricks page from Rick Steves mentions the possibility of subscribing a travel insurance policy covering collision damages:

Collision Coverage Through Your Travel-Insurance Provider

If you’re already purchasing a travel-insurance policy for your trip, adding collision coverage is an option. Travel Guard, for example, sells affordable renter’s collision insurance as an add-on to its other policies. It’s valid everywhere in Europe except the Republic of Ireland, and some Italian car-rental companies refuse to honor it, as it doesn’t cover you in case of theft. If your car-rental company doesn’t accept this coverage, and you have to buy other coverage to replace it, Travel Guard will refund your money.

If you do go with an insurer’s comprehensive travel coverage, be sure to add the insurance company’s name to your rental agreement when you pick up the car.

Moreover the article also mentions credit cards which include collision waiver insurance:

Credit-Card Coverage

Car-company CDW surcharges can seem like a racket when you consider that most credit cards already include collision coverage. By paying with the right credit card, you get zero-deductible collision coverage (comparable to “super” CDW)...likely for free. In other words, if your car is damaged or stolen, your credit card will cover whatever costs you’re liable for. The only major downside: If you do end up in an accident, dealing with credit-card coverage can be more of a hassle than what you’d encounter with the car-company CDW. But if a potential headache seems like a worthwhile trade-off for certain — and significant — cost savings, look into this option.