What Is the Purpose of Third-Party Insurance?

Third-party insurance is intended to protect you against the actions of another party. Such an insurance policy can be purchased by individuals or businesses to provide financial protection against the risk of the unknown. Having third-party auto insurance protects you from some accident-related costs. It is required by most states. Health insurance purchased for the owners and employees of small businesses also is classified as third-party coverage. The third party in that case is the insurance company that pays the actual provider of health care services.

Basics of Third-Party Insurance

Third-party insurance is a policy that you -- the first party -- purchase from the insurance provider, the second party, for protection against the actions of a third party. In the case of auto insurance, "third party" typically refers to the driver and passengers of another vehicle. Third-party insurance comprises bodily injury liability, which covers costs such as lost wages, medical expenses and property damage. The insurance kicks in when you are held responsible for the damage to another person's vehicle and injuries to anyone in it.

The Purpose of Third-Party Insurance

Third-party insurance covers only your liability for the damage to property other than your own and for injuries to other persons. It covers neither your own injuries nor damage to your own vehicle. If the other driver is injured or killed, third-party auto insurance covers the expenses. It pays legal costs if there is any litigation resulting from the accident, but it does not cover fines.

Making a Third-Party Claim

You should file a third-party claim when you believe the other driver caused the accident. The claim involves the insurance company of the other driver in the accident, so you must contact that insurer with details about the accident, including identification of the policyholder, a copy of the police report citing the other driver or eyewitnesses who can confirm your report. The company will pay for your accident expenses if it agrees that its customer caused the accident.

Other Types of Third-Party Liability Coverage

Operating a business may require you to get third-party insurance to cover your legal liability to third parties. Employment practices liability insurance is a third-party coverage option for companies to address claims made by customers due to acts committed by employees.

Errors and omissions liability protects professional firms against litigation resulting from the services they perform. It is called malpractice insurance when purchased by doctors, dentists, and chiropractors, and professional liability when obtained by lawyers, accountants, architects or engineers.