What Is Third-Party Insurance?

Quick Answer

Most states require drivers to carry third-party insurance as part of their car insurance policy. It allows other drivers to file claims against you if you’re liable for damage or injury in an accident, and it reduces your out-of-pocket burden.

Young casual man driving car and drinking coffee on the way to work.

Nearly all states require drivers to carry some form of auto insurance, but the types and amounts of coverage needed can vary by state. Some types of car insurance protect you and your vehicle, while others help shield you from the costs of damage you cause to others.

Most states require drivers to have third-party insurance, also called liability insurance. Third-party insurance protects you by paying for claims made by a third party that you cause injury or damage to in an accident.

What Is Third-Party Insurance for a Car?

When a car accident takes place, each group involved has a role:

  • First party: This is you, a driver involved in an accident. In a first-party claim, you file a claim with your own insurance, like if you back into a pole and nobody else is involved. However, you must have comprehensive and collision coverage in your policy for that benefit.
  • Second party: This is your insurance company.
  • Third party: This is the other driver involved in the accident, who can make a claim to your insurance (rather than their own policy) for injuries or damages caused by you. Or, if you are injured by a driver in a car accident, you could file a claim with their third-party auto insurance.

Third-party auto insurance, also called liability insurance, comes into play if you cause an accident that results in property damage or bodily injury to someone else. Impacted drivers can then file a claim with your insurance and potentially receive payment from your insurer.

This can include damage to another driver's car or to someone's physical property, like a home. Depending on the state and insurance plan, third-party insurance may also cover someone's medical bills, lost wages, pain and suffering and a rental car.

At-Fault vs. No-Fault Rules

Another important thing to know: Some states use at-fault rules, meaning in any accident, both insurance companies decide which driver is responsible (it can be one or both). Other states use no-fault rules, which apply if there's an accident with bodily injury.

In no-fault states, drivers must have personal injury protection coverage in their auto insurance. If a driver is hurt in an accident, regardless of who's at fault, this policy covers their own medical bills. For more serious injuries, however, the other driver may be able to sue the one who was at fault for the crash.

The designation of at-fault vs. no-fault states is really only relevant for accidents with bodily injuries. When it comes to accidents involving property damage, they're treated the same in at-fault and no-fault states, with the driver who caused the accident bearing responsibility for the costs. In these situations, the driver who experienced damage can file a claim with the third-party insurance of the driver who caused the crash.

Example of a Third-Party Insurance Claim

Third-party insurance helps cover the financial burden of damage or injuries you cause in an accident. In other words, it protects you when you're liable for expenses so you don't owe large amounts of money out of pocket. But how does this look in real life?

Let's say you're driving when you glance down at a new text. You don't notice in time that the car in front of you stopped suddenly. You rear-end them, damaging their vehicle and leaving the driver with a broken arm.

Just after the accident, the other driver (the third party) will collect your insurance information and can file a claim with your insurer. If you're in a no-fault state and their injuries are minor, that driver can file a claim with their own insurance to cover medical expenses. If you damaged their car or other property, they can file a claim with your insurance. On the other hand, if you're in an at-fault state, the other driver can file a claim for bodily injury and property damage with your liability insurance policy.

If your insurance approves the claim, the company will pay the driver who filed the claim. Should the damage go beyond your coverage, though, you may be responsible for some out-of-pocket costs.

A third-party claim involving you and another driver works differently from a first-party claim. In first-party situations, nobody else is involved in the accident and you file a claim with your own insurance to help pay for damage or injuries. However, not all standard insurance policies offer this, so check your terms.

Is Third-Party Insurance Required?

Nearly all states require their drivers to have some amount of third-party insurance, commonly referred to in policies as liability insurance.

However, the amount of coverage you need is determined by your state's laws. When you purchase a car insurance policy, the insurer will know how much coverage you need to comply with your state's laws.

How to Buy Third-Party Insurance

Most standard car insurance policies already come with third-party insurance, or liability insurance, included. When you're obtaining quotes for auto insurance policies, third-party insurance will usually be included, but double-check.

That said, the policy will have a cap for maximum claim payout. If someone files a claim against you that exceeds your liability coverage, you may have to pay out of pocket for the difference, so check policy terms carefully to see how much is covered.

You can usually modify your coverage limits as long as you have the minimum amount required. If you don't think a company's third-party insurance is enough to adequately protect you in a claim where you cause damage or injury, but you want to use that insurer, you can often pay a higher premium in exchange for greater coverage.

Compare Options Carefully

Even though most states require drivers to carry basic auto insurance, including third-party insurance for liability, options can vary quite a bit from company to company.

If you plan to switch your auto insurance, the Insurance Information Institute recommends obtaining and comparing quotes from at least three insurance companies so you can make sure you're getting the best prices, coverage, benefits and options.