The Complete Guide To Third-Party Liability Insurance

It’s tempting to focus on all of the exciting parts of starting your business (who doesn’t want to daydream about grand openings and happy customers?), but things can quickly go south if you don’t incorporate risk management into your plan.

Third-party liability insurance exists to protect your small business when accidents happen and people get hurt. Plus, for how much it can save you in potential losses, it’s relatively inexpensive — after all, third-party liability insurance is one of the most basic types of business insurance you can purchase.

Read more to learn all about third-party liability insurance and whether it’s the right fit for your needs.

What Is Third-Party Liability Insurance?

Third-party liability insurance protects you from lawsuits, claims, and damages when someone unrelated to your business — a third party — is in some way physically injured as a result of your business. Did a non-employee get hurt by a piece of equipment? Third-party liability covers that. Did your product accidentally cause someone to visit the emergency room? You guessed it — that’s covered, too.

Liability insurance is sometimes referred to as “slip and fall” insurance because slips and falls are the most common third-party liability claim. If your business is held liable for bodily injury or property damage, this policy protects you against the financial setbacks of having to pay damages and litigation fees out of pocket.

How Does Third-Party Liability Insurance Work?

Third-party liability insurance covers physical injuries the vast majority of the time. Let’s say someone slips and falls on your property and sues you. A third-party liability policy will pay for claimable damages (such as medical bills), legal fees, and damaged property. Your insurance company will provide lawyers and assistance to guide you through the process.

Assuming you’ve insured your small business for one million dollars of third-party liability coverage, and the medical bills and the legal defense (including judgments and settlements) amount to more than one million dollars, you would only owe any balance over your policy limit. If it was one million, three hundred dollars, you’d only owe the three hundred dollars. (This would be after your deductible is paid — you will set your deductible limit with your insurance expert.)

If something happens that you think might lead to a lawsuit, it’s never a bad idea to call your insurance company immediately and make a record of the incident right away — including the date, time, and names of any witnesses.

Who Is Considered A Third Party?

For starters, there are at least two parties for every insurance policy:

• The first party is the insured individual whose name appears on the fine print of the policy. Legally, your business counts as an individual.
• The second party is the insurer, i.e. your insurance provider.

A third party is neither the insured nor the insurer — it’s a legal term that refers to someone affected by a company’s actions but not directly related to the company itself. It could be a customer, contractor, or non-employee who might interact with your business. Any insurance issues that involve members of your staff would not be covered by a third-party liability policy.

Who Needs Third-Party Liability Insurance?

While only you will be able to decide what insurance packages are the right fit for your business, third-party liability insurance is definitely an endorsement you ought to consider. Basically, if there’s any possibility that someone could get hurt where your business resides or by what your business sells, then adding a third-party liability policy is a must. This is especially true if you run a business that has customers, has a storefront, ships goods, or provides on-site services.

According to the Small Business Association, up to 53% of small businesses experience a lawsuit. If a third party injures him/herself at your business, this is the insurance coverage you’ll need to avoid devastating financial claims against your company.

Nowadays, many are quick to litigate and assume businesses are covered by insurance when they actually are not. In fact, up to 40% of small businesses have never been insured. At the bare minimum, consider a general liability policy with a third-party liability endorsement.

What Third-Party Liability Insurance Covers

To recap — when your business is responsible for the harm dealt to a person or his/her property, then you’re protected under third-party liability insurance.

Let’s explore the kinds of incidents your business may find itself liable for and how third-party liability insurance helps:

• Bodily Injury That Occurs To Someone At Your Place Of Business: If a customer slips and falls on a spilled margarita in your restaurant, for example, then this insurance will cover the medical bills for your customer, and the legal costs to defend yourself in a lawsuit.
• Property Damage: Suppose your contractor breaks a client’s toilet while working at their home. Third-party liability insurance will take care of the cost of repairs.
• Harm Directly Caused By Your Business’s Product: You will be protected if a third party happens to get hurt because of your product, say if someone accidentally swallows non-edible materials or winds up with food poisoning through food you sold them.

What Third-Party Liability Insurance Doesn’t Cover

Since a third-party plan mainly covers physical injuries, many other instances of accidents or losses will need to be covered through different insurance policies.

Here’s what you shouldn’t expect to be covered by third-party liability insurance:

• Negligence: If it’s proven that accidents happened because of your own negligence, it’s quite possible the insurance company will not pay the claim. This is typically covered under a professional liability insurance policy.
• Financial Protection From Harm Directly Caused By Services You Provide: This one’s a bit tricky, but generally, if a third party suffers harm due to the service your business provides — physically or otherwise — then that won’t be covered. For instance, if giving professional advice is part of your business model, this insurance does not protect you from a lawsuit that results from your bad advice. This is oftentimes covered by professional liability insurance, but different specialized policies are available depending on the industry your business belongs to. Medical practitioners would need to consider medical malpractice insurance.
• Vandalism: Damage someone does to your building that constitutes vandalism would be covered under your commercial property insurance.
• Employee Injuries: While general liability will protect clients and customers, it’s not there to protect workers from the financial burden of an injury on the job. Any business with a single employee (state laws apply) needs workers’ compensation insurance to cover employee injuries.
• Car Accidents: If you use your car for business or if you have a fleet of vehicles you use, you will need commercial auto insurance.

The Benefits Of Having Third-Party Liability Insurance

Does third-party liability have benefits for small businesses? You bet it does! If you’re still on the fence, take some time to think over these benefits and how they can positively impact your bottom line:

• Financial Protection: Slip and fall cases average out to anywhere between $10,000 and $50,000. If your small business is financially vulnerable, and if you don’t have that sort of money lying around to pay for medical and legal fees, then a policy is not just a needed business expense — it’s imperative.
• More Business Opportunities: Some clients or customers may want to see proof of liability insurance before doing business with you. Having third-party liability insurance can help you win new business and establish credibility with new clients.
• Peace Of Mind: While not a financial benefit per se, it’s nonetheless important. Knowing that your business is protected against potential legal claims will put your mind and ease and may even help you make better-informed decisions down the road.

How To Buy Third-Party Liability Insurance

Third-party liability is a special add-on that’s usually included in a business owners policy (BOP). This plan often bundles general liability, commercial property, and sometimes business interruption service.

Most insurance companies, such as Nationwide, carry a basic form of commercial general liability insurance with third-party liability. Alternatively, you may be able to add this policy to an existing one. Ask about third-party liability coverage when you meet with an insurance professional to discuss your needs.

When you’re ready to make a purchase, there are quite a few places to secure a general liability policy for your business. You can use a website like Coverhound, Coverwallet, or Insureon to enter your business information and receive comparison quotes. If you already have an insurance policy through a carrier, check with a broker or insurance agent there to see about bundling a third-party liability policy into your plan.

Additional Types of Liability Insurance

There are many different types of liability insurance options for your company. Each policy is designed to cover a specific area of need for your business. Here are the main liability insurance policies available:

Talk with an insurance expert to see which policies are right for your business.

How Much Does Third-Party Liability Cost?

The cost of your insurance policy will be determined by the type of business you run and the amount of coverage you think you’ll need. Thankfully, since third-party liability is a very basic and foundational form of insurance, it’s not terribly expensive. According to The Hartford, a leader in the insurance world, the average monthly price for one million dollars in general liability ranges between a few hundred dollars to $1,000 per month.

Policies that offer less coverage could cost as low as $50 a month.

Some of the things that may affect your monthly premium are:

• Your specific risks
• How much liability insurance you need
• What type of business you run
• The size of your business
• How many employees you have
• Your payroll
• Your insurance claims history
• The location of your business

The Bottom Line On Third-Party Liability Insurance

Third-party liability protects others from your mistakes. It’s a small cost to pay upfront for your peace of mind, financial health, and even your business’s reputation. Accidents happen in the world of business – don’t let being underinsured be one of them. The protection liability insurance provides is priceless.

Do your homework, research the best policy for your business and industry, and get covered today!

Third-Party Liability Insurance FAQs