What Is Third-Party Insurance?

by Tim Plaehn, studioD

Generally, third-party insurance is coverage purchased to protect against the actions of another party -- the third party. Insurance regulations may require an individual to buy a form of third-party insurance to provide adequate protection against possible risks.

Liability Insurance

In the business world, the use of third-party insurance can be used to protect a business against the actions of others that may cause harm to the business. For example, a company buys liability insurance that covers the company if it is sued due to the actions of an employee. In this case, the company is the first party, the insurance company is the second party and the employee is the third party. Pet liability insurance is another form of third-party insurance, protecting the pet owner against the actions of a third party, his dog. If the dog attacks someone the insurance protects the pet owner from the possible expenses of medical care.

Auto Insurance

With automobile insurance, an uninsured and underinsured insurance clause or rider is a form of third-party insurance. In this case, the third party is another motorist who does not have insurance or enough insurance. If the underinsured motorist is the responsible party in an auto accident, the uninsured/underinsured clause in the other driver's insurance policy will cover the costs the at-fault driver's insurance should have covered, if she had enough insurance. This type of third-party coverage covers a dangerous gap in the coverage provided by the standard auto insurance policy liability coverage.

Government Health Insurance

Under government-provided Medicaid health insurance, any other health insurance coverage is regarded as third-party insurance. In this case, two of the parties are insurance companies and the rules determine which company is responsible for paying for the health care of the middle party; the middle party is the individual covered by Medicaid and another health insurance plan. Federal Medicaid rules refer to other insurance plans, including Medicare, as third-party insurance, but that insurance must pay first, before Medicaid covers any medical costs.

Insurable Interest

An important consideration in the purchase of third-party insurance is an insurable interest by the the first party in the actions of the third party. For example, an individual cannot buy life insurance on his neighbor just to profit if the neighbor dies. The first person does not have an insurable interest. However, if the neighbor is also a business partner, an insurable interest exists. The person may buy insurance with the neighbor as the third party to make sure the business can continue to function if something happened to the neighbor.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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