An insurance policy offers monetary protection against contingencies. Insurance is of two broad types: life insurance and general insurance. In this article, we discuss third party insurance, a subset of general insurance.
What is third party insurance?
The name ‘third party’ stems from the fact that the beneficiary of the policy is someone other than the two parties of the contract: the insured (that is, you) and the insurer. Also known as ‘act-only’ or ‘liability-only’ insurance, a third party insurance policy offers monetary coverage against a third party’s losses or damages caused by you or your insured asset. However, you, being the insured/policyholder, will not receive any benefits or compensation on the occurrence of the event.
Inclusions and exclusions of a third party insurance policy
Inclusions of insurance mean the items/events covered by a policy and exclusions are those that are not covered. A typical third party insurance cover has the following inclusions and exclusions:
- Monetary protection against the damages caused to the third party by the insured
- Damages include death, disability or physical injuries caused to the third party. In addition, damages sustained by the third party’s vehicle or property is also included
- Damages due to an accident caused when driving under the influence of alcohol
- The driver is a minor or is guilty of driving without a valid motor driving license
- The accident was planned
- The vehicle was used for illegal activities or commercial purposes
- The vehicle was stolen when the accident occurred
Terminologies used in a third party insurance policy
Understanding the terminologies used in a third party insurance policy is key to know how the policy works. Note these:
- First party: is the insured or the policyholder
- Second party: is the insurance company or the insurer
- Third party: is the person who sustains damages and claims compensation for damages caused by the first party
Types of third party insurance
Talking about the insured property, it can be: a motor vehicle, a rented house or a business premise, depending on the type of the policy. These are called:
- Third party accident insurance
- Renters’ insurance policy
- Business liability insurance
How does a third party insurance policy work?
A third party insurance policy doesn’t compensate the insured but a person not part of the contract. Let’s take an example of motor vehicle insurance. Having third party insurance for both two and 4-wheelers is a prerequisite in India as per the Motor Vehicles Act. Without it, you can face legal consequences. So this is how the policy works.
In case of an accident caused by your insured vehicle, you’ll be liable to compensate the victim, who will raise a claim against your insurance policy. The insurer will then assess the damage caused and compensate the third party who has sustained injuries/damages. But the policy doesn’t cover the injuries you sustain or the damages caused to your property/vehicle. It only covers your financial liability arising due to the death, disability, loss or damage caused to a third party property/vehicle.
In doing so, a third party cover indirectly protects you by reducing your financial burden. In case of an accident, the insured is required to immediately inform the insurer about the same. On filing the claim, the insurer appoints a surveyor to assess the damage caused and verify the estimated cost of repairs or compensation. After the completion of the verification, the insurer settles the claim. Continue to read the significance of a third party insurance cover, details to be furnished when submitting a claim, and the process to claim third party insurance here.