Third party liability insurance is also called public and products liability insurance. It covers you if a member of the public makes a compensation claim against you because they believe that you are responsible for them having been injured, or for their property being damaged.
You aren’t legally required to have this type of insurance, but because compensation claims can be expensive and difficult to settle, it would be unwise to consider trading without it. You may also be required to have third party liability insurance as a condition of a contract with one of your clients or as a condition of your membership of a trade or professional organisation.
Public vs products liability insurance
Public liability insurance covers you if the third party’s injury or property damage was a result of something that you are alleged to have done or failed to do. Products liability insurance covers you if the injury or damage was due to an alleged defect in a product that you have sold or supplied.
Financial loss cover
A standard public and products liability insurance policy will only cover compensation claims that involve an injury or property damage. Claims for purely economic losses are not usually covered.
As such, it is important to make sure that your public and products liability insurance includes a financial loss cover extension so that you are covered if a compensation claim for a purely economic loss is made against you.
Professional indemnity insurance
Public and products liability insurance covers you if a compensation claim arises from something you have done or failed to do, or from a defect in a product that you have sold or supplied.
However, there is no cover if your liability to a third party arises as a result of professional negligence. You need professional indemnity insurance to cover these potential liabilities if you are providing professional services.
As well as paying compensation claims, your third party liability insurer will also defend any claims on your behalf. This is an important feature of this type of insurance because it means that you do not have to worry about dealing with potentially complex legal arguments.
The size of claims
As mentioned, compensation claims can be expensive to settle. As well as the amount of compensation awarded, there could also be an amount for any wages that the claimant has lost as a result the incident as well as legal fees and other costs and expenses.
A relatively minor incident can easily cost £1,000 to settle. Serious injuries and major property damage can cost over £250,000 to settle.
Third party liability insurance has an indemnity limit. This is the maximum amount that the insurance company will pay in the event of a claim.
The standard indemnity limit is usually £1,000,000 but you can select a higher limit for an additional premium. You might need a higher indemnity limit because it is a requirement of a contract with one of your clients, or you might decide you need a higher indemnity limit because the standard limit is insufficient given the nature of the work that you do.
Like many types of insurance, third party liability insurance usually contains an excess. This is the amount that you will need to contribute if you need to make a claim.
It is important to note that even if your insurance company successfully defends a compensation claim that has been made against you and no payments have been made to the claimant, there will still have been costs that have incurred. This means that you might have to pay an excess even if the compensation claim that has been made against you is invalid.