Collision and damage is exactly as it sounds; it covers any damage to the car that's you'd normally be liable for. Either due to an accident that was your fault or something like vandalism. If you don't have it and you damage the car, you're on the hook. This is the coverage that credit cards generally provide.
Liability is really the big one you have to watch out for as that covers you against any damage to people or property that you cause. Most places will include the state or provincial minimum liability as part of the rental fee, but some don't include anything at all. If you cause a serious accident and don't have some form of liability you're going to be in a mess.
Often your own car insurance will cover you for liability and if you're not covered it's usually possible to get it with a pretty small yearly fee. So I'd check your own policy (if you have one) and then the policy of the place you're renting from. If you have liability coverage through either of those you're good (though you can pay extra to bump up to a higher limit if the minimum coverage is low). If you're not covered you really should get some kind of liability insurance; the risk of not having it is simply too great.
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