What Is Third-Party Insurance?

Third-party insurance is a policy purchased by the insured (first party) from the insurance company (second party) for protection against the claims of another (third party). A common example of third-party insurance is car insurance, which is designed to protect you against the claims of other drivers in case of an accident.

Understanding Third-Party Insurance

Third-party insurance is essentially a form of liability insurance. The first party is responsible for their damages or losses, regardless of the cause of those damages. One of the most common types is third-party insurance is automobile insurance.

Third-party offers coverage against claims of damages and losses incurred by a driver who is not the insured, the principal, and is therefore not covered under the insurance policy. The driver who caused the damages is the third party. For auto insurance, there are two types of third-party liability coverage:

1. Bodily injury liability: Covers costs resulting from injuries to a person, such as hospital care, lost wages, or pain and suffering due to an accident
2. Property damage liability: Covers costs resulting from damages to or loss of property, such as replacing landscaping and mailboxes, or compensation for loss of use of a structure.

In some cases, third-party insurance may be required by law. Drivers, for example, must carry at least a minimal amount of bodily injury liability and property damage liability coverage. These coverage requirements vary from state to state. A few states do not require both or have other limitations. Each state sets its minimum requirement for each type of coverage.

Even in “no-fault” states, liability coverage is all but essential. No-fault laws do not protect you from million-dollar injury lawsuits stemming from seriously injured third parties.

Both types of third-party insurance are important for individuals, such as homeowners, with substantial assets to protect. The more money and assets an insured has, the higher the limit should be for each type of liability coverage.

Special Considerations

In most countries, third-party or liability insurance is compulsory for any party sued by a third party. Public liability insurance involves industries or businesses that take part in processes or other activities that may affect third parties, such as subcontractors, architects, and engineers. Here, the third party can be visitors, guests, or users of a facility. Most companies include public liability insurance in their insurance portfolio to protect against damage to property or personal injury.

Product liability insurance is typically mandated by legislation, which varies by country and often varies by industry. This insurance covers all major product classes and types, including chemicals, agricultural products, and recreational equipment. It protects companies against lawsuits over products or components that cause damage or injury.

The Bottom Line

Third-party insurance is a form of liability insurance that covers you when someone makes a claim against you for damages. A common example of this is auto insurance, which will pay another driver who is injured in an accident that you have caused. Another common type of third-party insurance is for property damage. Third-party insurance protects you against having to potentially pay thousands or tens of thousands of dollars in claims. Like other forms of insurance, you may not need it. But if you do, it could save you extremely large amounts of money, or even protect you from bankruptcy.