Third-Party Insurance

Updated on March 12, 2024
Article byWallstreetmojo Team
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

Third-Party Insurance Meaning

Third-party insurance refers to a type of liability insurance that covers the damages or losses caused by the policyholder to another party. The scheme does not compensate for losses that occurred to the policyholder. One of the examples is product liability insurance used by businesses.

If the policyholder’s liability to the sufferer is legally confirmed, the insurance company gives financial support based on predefined terms to policyholders to compensate the sufferer. For example, product liability insurance compensates any legal responsibilities to other entities originating from injury or damage caused by the policyholder’s business’s product.

Key Takeaways

  • Third-party insurance covers the legal liabilities of policyholders towards a third party.
  • The liability arises primarily when the policy holder’s actions lead to death or injury to a third party and loss or damage to the third-party property.
  • Examples include third-party vehicle and product liability policies. 
  • This category is mandatory in many parts of the world and is mainly seen in the automobile industry, where third-party insurance for two-wheelers and cars are standard. The use of this insurance in cybersecurity and e-commerce is also growing.

How Does a Third Party Insurance Work?

In third-party insurance, the policyholder is the first party, and the insurance provider acts as the second party. The third party is the one affected by the policyholder’s actions. For example, if the policyholder’s vehicle collided with another car and he is at fault, the other causalities of the accident are called third-party. When the insurance claim is made and approved, it is used to pay for the liabilities of the sufferer rather than the policyholder.

Third-party insurance

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If an unfortunate event occurs, the insured should inform the insurer and file the claim. Subsequently, the insurance company will conduct a verification process and settle the claim. If a violation of their terms is found, they may not pay for the damages. It leaves the responsibility to the policyholder. If no violations are found, the insurance company will take the responsibility of paying for the damages.

Some events can lead to the denial of the claim. In the case of automobile insurance, these include:

  •  Drunk driving
  • If the vehicle was being used for a purpose that it was not authorized to when the accident occurred.
  • If the accident was a deliberate act.
  • If the driver was not fit to drive such as by being underage or having license problems (no license, expired license, suspended license).

If a vehicle had an accident under the above circumstances, it would void the insurance. The responsible entity would have to pay for all damages using their money. Though most third-party policies cover vehicles, they can be associated with the technology industry, business management, ships, e-commerce risks, and aviation.

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What Does Third-Party Insurance Cover?

The third-party scheme focuses on problems that occur to other accident victims. The nature of liabilities that the insurance company covers depends on the company and related legislation. The terms and conditions of such insurance vary greatly depending on the company providing it. Local, county, state and federal laws also influence the terms and conditions. It usually compensates for damages to the third-party vehicle and properties, causalities, and death of the third party. Generally, let us enumerate what’s covered by third-party insurance as follows:

  • Bodily damage: Financial consequences faced by the accident victim come in different forms, like medical expenses associated with bodily injury.
  • Loss of life
  • Property damage: Excluding the policy holder’s property.

Third Party Insurance in Car

In most places, third-party car insurance is mandatory to protect people at no fault in an accident from its financial consequences. It also comes with a lower insurance premium compared to comprehensive car insurance. Moreover, with a third-party car policy, the car owner at fault in the accident can meet the liability during the unfortunate incident.

Failure to have a legal third-party car accident coverage program can result in high penalties, legal complications, and perhaps the cancellation of the driver’s license. Insurance company plays a significant role in determining who caused the accident and who should pay. However, in certain states, both parties must deal with the liabilities in an accident. Generally, the coverage is for bodily injury or death of a third party, damage to the vehicle, and other third-party properties.

Third Party Insurance in Bike (two-wheeler)

A third-party bike policy does not protect the policyholder from the cost of any damage to their bike or belongings in the event of an accident. Applying for such specific insurance for a bike is similar to doing so for a car. The process is usually quick. A certificate showing that the bike owner has a third-party policy must be visible on the vehicle in some jurisdictions.

As with cars, the bike rider claims the cover if they got into an accident, which is their fault. In addition to other vehicles or bikes, such insurance can be used when the bike damages goods and property (such as when driving recklessly). Third-party claims are also common for pedestrian injury. It happens when the bike injures a pedestrian during the accident.

Frequently Asked Questions (FAQs)

What is the difference between third-party insurance and comprehensive insurance?

Comparing third-party vs. comprehensive insurance discloses the variations in the coverage they offer. For example, a comprehensive scheme covers damage and losses to the insured person and the third party. On the other hand, a third-party plan focuses on liability arising from damage caused to a third party or their property.

What is a third-party liability in motor insurance?

In the automobile industry, the third-party liability section assists the insured person in settling his liability towards a third party and their property. For example, a third party or their vehicle or property was affected due to a road accident caused by the insured person. With the help of the policy, the insured person can compensate the sufferer.

Who are the 3 parties to the insurance?

The insurance policy contract portrays the relationship between the main parties involved: the insurer who provides the financial assistance in insurance and the insured who avails of the insurance service. The insured person is the first party, the company providing the protection or coverage is the second party, and the sufferer of the accident is the third party.

This has been a guide to Third Party Insurance & its Meaning. Here we discuss third-party insurance in the car, bike, how it works, and how it covers them? You can learn more about from the following articles –