It’s rather ironic that an industry as cut and dry as insurance would have a term called third-party liability. When you think of a party you tend to think of a festive occasion. Not so in the world of insurance. There is little to celebrate when a third party comes on the scene.
Before talking about the third-party, here’s a little information about the first and second party. An insurance policy is a contract that is an agreement between two parties. The first party is the person who purchases the insurance, and the second party is the insurance company.
First and Second Party Agreement
In the contract between the two parties if there is a claim the first party gets paid. For example, Sally purchases a homeowners policy and shortly thereafter a portion of her house is destroyed in a major storm. The insurance company pays for the damage by issuing a check to Sally so she’s able to repair or replace the damaged portion of her house. The first party gets paid and the second party does the paying.
Enter the Third Party
It is perfectly acceptable to have a policy involving only a first and second party, but that wouldn’t be much fun. A party is not a party until an uninvited guest shows up. In this case, the uninvited guest is called the third party. A third-party is anyone other than the first or second party. A third-party usually means trouble in the form of a liability suit.
Third Party Liability Claim
Say Mr. Third Party walks past Sally’s newly repaired house. Being a bit of a clutz Mr. Third Party trips and falls. He decides to file a claim against the owner of the house. His claim is called a third-party liability claim and Sally’s insurance company issues the check to Mr. Third Party. Mr. Third Party was uninvited and walks away with the goodie bag.