# Third-Party Liability Insurance Types

> **Definition**
>
> A third-party liability insurance policy protects the policyholder from financial claims made by another party.

## What Is Third-Party Liability Insurance?

Third-party liability insurance is a policy purchased from an insurance company that protects the policyholder against claims made by a third party for damages due to the policyholder's actions.

A common example of third-party liability insurance is car insurance, which is designed to protect you against the claims of other drivers in case of an accident.

### Key Takeaways

*   Third-party liability insurance, such as car insurance, covers an individual or firm against losses claimed by some third party.
*   The first party is the insured, the second party is the insurer, and the third party is the person claiming the loss.
*   The two main types of third-party liability insurance are bodily injury liability and property damage liability.
*   Most people are required by law to carry different forms of liability insurance on their homes and vehicles.

![Third Party Liability Insurance](https://www.investopedia.com/thmb/tlc59z-DFN2-_DuNCDwpIwLID-Q=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/third-party-insurance.asp-final-b7340589f6924533b922106d46bd6ba6.jpg)

*In the case of auto insurance, third party liability is required by law. — Investopedia / Jake Shi*

## Understanding Third-Party Liability Insurance

Third-party [liability insurance](https://www.investopedia.com/terms/l/liability_insurance.asp) is very common. One of the most well-known types is [automobile insurance](https://www.investopedia.com/terms/a/auto-insurance.asp).

It offers policyholders financial coverage for claims made against them for damages and losses suffered by a driver (the third party).

That is, third-party liability insurance is a way for the policyholder (the first party) to cover their legal and financial obligations related to the costs they cause someone else to bear.

For auto insurance, there are two types of third-party liability coverage:

1.  **Bodily injury liability**: This covers costs resulting from injuries to a person, such as for hospital care, lost wages, or pain and suffering due to an accident.
2.  **Property damage liability**: This 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 liability 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](https://www.investopedia.com/what-is-no-fault-insurance-and-do-you-need-it-5089251) 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 liability 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.

> **Important**
>
> The idea behind liability is that legally you are accountable for the damage or injury that you cause another person (or property) whether as a result of an accident, mistakes, or negligence.

## Special Considerations

### Other Types of Third-Party Liability Insurance

In most countries, third-party liability insurance is [compulsory](https://www.investopedia.com/terms/c/compulsory-insurance.asp) for any party sued by a third party. Public liability insurance involves industries or businesses whose activities may affect third parties, such as subcontractors, architects, and engineers.

Third parties also can be visitors, guests, or users of a facility. Most companies include public liability insurance in their insurance portfolio to protect against damage they may cause to others' property or personal injury.

Product liability insurance is typically mandated by legislation, which varies by country and often 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.

## What Is the Importance of Third-Party Liability Insurance?

Third-party liability insurance offers the policyholder coverage for their financial obligation due to injury or damage they have caused another person or business. Without it, a person or business would have to pay for the damage they have caused out of their own pocket.

## Who Are the Parties in Third-Party Liability Insurance?

The first party is the person or business that purchases the insurance (the insured). The second party is the company providing the insurance (the insurer). The third party is some person or business that makes a claim for damages from the insured.

## What Does Third-Party Liability Insurance Cover?

Generally, it covers the third party's medical bills or costs for repairs. It covers legal fees, court-ordered settlement amounts, and the insurance company's costs to handle claims, including some investigation fees.

## The Bottom Line

Third-party liability insurance covers you financially when someone makes a claim against you for damages arising from your actions.

A common example of this is auto insurance, which will pay the medical bills of a driver who is injured in an accident that you have caused.

Like other forms of insurance, you may never need it. But if you do, it could save you enormous amounts of money and protect you from bankruptcy.

> **Article Sources**
>
> 1.  Insurance Information Institute. "[What Is Covered By a Basic Auto Insurance Policy?](https://www.iii.org/article/what-covered-basic-auto-insurance-policy)"
>     
> 2.  FindLaw. "[Car Insurance Laws By State](https://www.findlaw.com/injury/car-accidents/car-insurance-laws-by-state.html)."
>     
> 3.  Insurance Information Institute. "[Background On: No-Fault Auto Insurance](https://www.iii.org/article/background-on-no-fault-auto-insurance)."