What is third-party liability insurance?

Imagine a customer slips and falls in your store or an employee accidentally damages a client’s property. Who pays for the damages? That’s where third-party liability insurance comes in.

Business insurance should protect your business as well as risks that could affect others. When you purchase a policy, you enter a legal agreement between your business (the first party) and your insurer (the second party). However, you’ll also often hear about third party insurance. So, what is third party liability insurance, and what does it cover?

Insurance jargon can be confusing. Fortunately, third party insurance is actually a pretty straightforward concept, which we will explain in this article.

What exactly is a third party?

So, we have established that the first party is the insured, and the second party is the insurer, but who is considered a third party? 

A third party is anyone outside your business who interacts with it. This can include customers, clients, suppliers, or contractors. If they experience property damage or injury due to your business, they may file a claim against you.

If a third party is involved in an injury, such as a slip and fall at your workplace, first party insurance will not provide coverage. If the third party files a claim against your company, you’ll need third party insurance to cover legal costs and other possible damages.

Does your business need third-party liability insurance?

The short answer is “yes.”

Third party business insurance is one of the basic and vital foundations of any risk management program. While some businesses may benefit more from third party coverage, it is an essential type of insurance for most.

If your business has direct contact with customers, clients, suppliers, or contractors on an everyday basis, you’re going to need some level of third party insurance. Standard (first party) business insurance only protects your company and employees—not anyone else.

Think of it like car insurance. If you only have first party coverage, your policy only covers damage to your vehicle and not that of third parties. If you cause an accident, you’d be responsible for paying out of pocket for the other driver’s repairs or medical expenses. Third party business insurance works the same way, covering liability risks that could otherwise become costly legal or financial losses.

What does third party insurance cover?

The specifics of your third-party coverage will depend on the policy you add it to. BOPs, general liability, commercial property, and commercial auto are the most common insurance policies that businesses add third party coverage to.

Third-party insurance covers property damage or injury when a third party claims your business is responsible. It helps protect against legal and financial liabilities arising from such claims.

Here are a few common examples of third party insurance coverage:

• After eating at your restaurant, a patron comes down with food poisoning and decides to sue your business.
• A mechanic employed by your auto repair company damages a car a customer brought in for repair.

In the above scenarios, third party insurance covers legal costs and medical bills for property damage and bodily injuries.

What it doesn’t cover

As you might expect, the main thing that third party insurance does not cover is claims related to parties within your business. 

However, there are a few other business issues that will not be covered by typical third party insurance.

Professional mistakes

The most common example is an instance that an errors & omissions insurance policy would cover. If your company’s negligence or poor advice leads to a customer or client losing money, they could file a claim against you. Instead of third party insurance covering these claims, you’ll need an E&O or professional liability policy.

Professionals such as doctors, accountants, and lawyers often purchase specialized malpractice insurance policies that are specifically written to address the risks most present in those professions. For example, law firms would purchase a legal professional liability product, and healthcare providers would purchase medical malpractice insurance.

Cyberattacks and data breaches

Another example of a claim that won’t be covered by standard third party business insurance is cybercrime. If your business was the victim of cybercrime that caused damages to your customers or partners, you would need a cyber liability policy.

Workers’ compensation claims

If an employee gets injured on the job, third party insurance won’t cover their medical bills or lost wages. Instead, you’ll need workers’ compensation insurance, which is a legal requirement in most states for businesses with employees.

Types of third-party endorsements

Third party insurance protects individuals and entities outside your business. When adding third party coverage to a policy, businesses typically make two common types of endorsements. 

Loss payee

A Loss Payee is a third party with a financial interest in insured property. Loss payees may include lenders or leasing companies. In the event of property damage, the loss payee is entitled to insurance payments to protect their financial stake. For example, if your business finances equipment, the lender may require that you list them as a loss payee to ensure they receive compensation if the equipment is damaged. 

Additional insured

An Additional Insured is an individual or entity that you add to your insurance policy, granting them coverage under your policy’s terms. This is common in business relationships where one party seeks protection from potential risks that may arise from the other’s operations. For instance, a contractor might request to become an additional insured on a subcontractor’s policy.

Why is third party insurance important?

Beyond basic liability protection, third party insurance safeguards your business from unexpected financial burdens. Here’s why it matters:

• • Protects against costly legal claims: If a third party sues your business for bodily injury or property damage, third party insurance will cover legal fees, settlements, and judgments.

• Helps meets contractual obligations: Landlords, clients, and partners often require third party coverage before signing contracts.

• Ensures business continuity: A major claim or lawsuit could disrupt operations or even force a business to close. Third party insurance helps mitigate financial risks, keeping your business running smoothly.

How much does third party insurance cost?

As with all other insurance policies, there are a large number of factors that influence the price of third party liability coverage. But considering that it’s a pretty basic type of coverage, it usually isn’t very expensive.

Your third party insurance premium will vary depending on the following factors:

• Your business industry
• Specific risks associated with your industry and business
• Size of your company
• Number of staff you employ
• Number of locations you run
• Your history of third party liability insurance claims

Protect your business from third-party claims

The most important aspect of procuring third party insurance is effectively assessing your risks and determining which policies need a third party endorsement.

If one thing is for sure, it’s that navigating the risk sector and finding the right insurance company for your needs is a difficult task. If you’re interested in learning more about this insurance type and purchasing third party liability insurance to protect your business properly from these types of risks, feel free to reach out to one of our expert brokers at any time.

To learn more about how to find the right coverage for your business, check out Embroker’s digital insurance platform.