Breaking Down Your Insurance Policy: Third-Party Liability Coverage

man in car


Life is full of risk.

Slips, falls, and car accidents are very common and can lead to huge medical bills, lawsuits and the poorhouse if you aren’t properly protected by insurance.

A major part of insurance protection is third-party liability coverage, which will respond on your behalf if you manage to hurt a third party or damage their property.

Not sure what third-party liability insurance is? Read on to learn everything you need to know about this essential insurance.

What is third-party insurance?

Basically, third-party insurance is liability coverage that’s purchased by a consumer (first party) from an insurance company (second party) to protect against claims from other people (third party) for injuries or damage the first party causes.

Third-party insurance comes bundled into standard homeowners, renters and many business policies and is required as part of your car insurance in every state in the country.

Why do I need it?

Risk is everywhere, and if you (or your house, your car, or your business) manage to cause bodily injury or damage to a third party or their property, you could be on the hook for some serious damages, and there’s the chance that a lawsuit might follow.

Litigation is very common these days. If you’re on the wrong end of a lawsuit, you’ll be looking at some serious expenses for both legal defense and any resulting judgments or settlements.

Car crashes happen every second of every day. According to the National Highway Traffic Safety Administration, an estimated 2.31 million people were injured in motor vehicle crashes in 2013.

Falls and slips are very common and can result in very expensive claims. According to statistics from the National Safety Council, the average claim cost in 2009-2010 for a fall or slip was $41,393 making it the second most expensive claim after motor vehicle claims.

Regardless of whether you‘re at fault in a car accident or someone trips and falls at your house, you can be held liable. Liability coverage can protect you in certain situations.

Common types of third-party insurance coverage

Auto insurance

There are two different types of third-party coverage for auto insurance, and they’re both required in most states.

Bodily injury: This type of coverage is mandatory in all states and covers another person’s physical injury due to an accident that you’re responsible for. Coverage extends to their actual physical injuries, pain and suffering, and even death.

Bodily injury coverage is written with two limits: the first applies to each person; the second is related to each accident. As an example, minimum recommended coverage levels are usually $100,000/$300,000, which translates to policy limits of $100,000 per person in an accident and $300,000 total per incident. Required coverage levels vary by state, but can be as low as $10,000/$20,000, which is hardly sufficient for a serious accident.

Bodily injury covers the following costs if you’re liable for an accident:

  • Medical expenses: It not only covers the cost of emergency services, hospital care, and follow-up visits, it also covers the costs of wheelchairs, walkers and crutches, if necessary.
  • Legal fees: Lawsuits happen after an accident, and if you were responsible for the crash, you could be sued. Liability coverage also includes the cost of your defense and any judgments or settlements up to policy limits.
  • Lost income: If the driver you hit is seriously injured, they may need physical therapy or be unable to work for weeks or even months. This loss of income would be covered by your bodily injury liability coverage up to policy limits.

Property damage: This type of third-party liability insurance helps pay for any damage you do to another person’s property with your vehicle. While it’s usually the other person’s car that’s damaged in an accident, it can also cover other property such as trees, fences, mailboxes and even garages.

This is required coverage, but like bodily injury, required coverage levels vary and can be as low as $10,000. Most experts recommend carrying at least $50,000 in property damage.

It is important to remember that third-party insurance like bodily injury and property damage is solely for the benefit of a third party, it’s not designed to cover your medical bills or pay to repair your vehicle.

Renters insurance

While the main point of renters insurance is to protect your belongings in the event your apartment or rental home is damaged or destroyed, these policies also offer third-party liability coverage.

The liability portion of the policy helps cover bodily injury and property damage claims for injuries or damage that happen to third parties in your apartment, or even as a result of your normal activities away from home. A slip, fall, or dog bite can result not only in medical bills that have to be taken care of, but also the possibility of a lawsuit.

Coverage is restricted by the policy limits, so make sure you have a complete understanding of your limits. Low limits can leave you on the hook for the balance if you are sued.

The property damage portion of the policy pays for damage to your neighbor’s property. As an example, if one of your children boots a football through a neighbor’s window, the repair costs will be covered.

Homeowners Insurance

Homeowners insurance not only pays to repair or rebuild your home and replace your property, it also offers third-party coverage. Just like renters insurance, homeowners coverage offers third-party protection against liability claims and covers medical costs, lawsuits, pain and suffering, lost wages and even death benefits.

Here is a quick rundown of the various benefits offered by homeowners third-party coverage:

  • Medical bills: Just like car or renters insurance, third-party liability can help cover the medical bills of someone who is injured on your property. If a person slips on a snowy sidewalk, falls down your stairs or is attacked by your dog, you may be responsible for the medical costs.
  • Pain and suffering: If a court awards pain and suffering damages to someone injured in your home, the liability portion of the policy can cover these costs.
  • Lost wages: If the injury sustained in your home prevents that person from working, you can end up legally liable for their lost wages. Liability coverage can also cover these expenses.
  • Legal defense: The cost of legal defense if you’re sued can be enormous. Luckily, the liability portion of your homeowners policy pays these bills in addition to the policy limits.

Business owners policy

A business owners policy combines a variety of coverages into one policy that offers comprehensive protection to business owners. One of the major components of such a policy is third-party liability, which protects your business should it cause harm to others. This coverage not only applies to customer slips and falls in your store, but also to damage from defective products, incorrect installation and harm caused by one of your employees.

Umbrella policy

A personal umbrella policy is all about third-party liability. It kicks in when you reach the policy limits on your auto, homeowners, renters or even condo policy. It is basically a big bucket of extra liability protection.The cost of a lawsuit can quickly spiral out of control, and having an extra layer of protection can be a financial lifesaver.

The great thing about umbrella policies is that they offer loads of liability coverage at a very reasonable price. Premiums can vary, but expect to pay roughly $150-$250 per year for $1 million in coverage.

Where can I get third-party insurance?

This coverage is bundled into many policy types, so there’s a good chance you already have some third-party liability coverage in your auto, home or renters insurance.

One important thing to remember is that liability coverage only pays out up to the policy limits, and setting the right limits is extremely important with third-party liability insurance. In almost all cases, state-required minimums for auto insurance liability aren’t sufficient to protect your assets.

The same can usually be said of homeowners insurance. Most standard policies come with $100,000 to $300,000 in liability coverage, which sounds like a lot but will quickly be eaten up if an accident happens.

Hospital bills, regardless of whether for a car crash or someone falling down your stairs, can easily reach $100,000 within days if the injuries are serious, so it’s essential to carefully consider your liability limits. Raising your liability limits is always a good idea, and in most cases it’s very affordable.

Adding an umbrella policy is also an inexpensive way to bump up your third-party liability coverage.

Trusted Choice® agents can help you determine what third-party liability coverage levels you should be carrying to ensure that your assets are completely protected in the event of an injury or lawsuit. Talk to a local agent today.

Trusted Choice can also help you choose the best insurance agent for your needs.

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