What is Third Party Liability Insurance?

Third party liability insurance is one of the most important covers your business can get. However, many people are unaware of what it actually entails. 

Generally speaking, the term is referring to bpth products and public liability insurance. These cover you if a member of the public (including a client) makes a compensation claim against you because your work or a product you’ve sold has led to them sustaining injury or property damage.

While you aren’t legally required to have third party liability insurance, compensation claims of this nature can be expensive and difficult to settle, meaning it would be unwise to trade without it. You may also need to have third party liability insurance due to a term of a contract with one of your clients or as a condition of your membership of a trade or professional organisation. 

Let’s look at this all-important cover in more detail. 

Third party liability defined

When you take out a public/products insurance policy, you form a legal relationship with your provider where you’re the ‘first party’ and they’re the ‘second party’. 

The ‘third party’ isn’t involved in this contractual agreement, but may be impacted by it. This is typically a member of the public who sues you for one reason or another, which is where third party liability insurance comes into play. Your policy will cover any legal expenses involved and the compensation payment should you lose the case, up to your policy limit.

Who could a third party be?

A third party could be a customer, a client, a supplier, or simply somebody who comes into contact with your company in public. For example, a road surfacer may encounter many passersby on the job. If any of these individuals are harmed or suffer property damage due to your business, they could sue you. 

Public vs products liability insurance

Public liability insurance and products liability insurance are usually included in the same policy, but they cover slightly different things.

Public liability insurance protects you if a 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.

Examples of third party claims

Public liability insurance

Let’s say you’re a builder who leaves out a tool box that somebody trips over, injuring themselves as a result, or a scaffolder working from height who accidentally drops a tool that smashes the window of a car below. In these instances, you might be sued and have to pay the claimant damages..

Products liability insurance

Similarly, imagine that you own a catering business and accidentally sell food with a foreign object embedded in it that causes a customer to choke. Or you’re a handyman who’s installed a kitchen appliance that malfunctions and starts a fire in your client’s house. Again, having third party liability insurance in these scenarios could help to protect you financially if the product is either yours or has been altered by your business, has your business’s name on it, or has been imported from outside the EU.

Other things to bear in mind

Legal assistance

As well as paying compensation claims, your third party liability insurer will also pay out to 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 a fee for any wages that the claimant has lost as a result of the incident, as well as legal fees and other costs and expenses. A relatively minor incident can easily cost £1,000 to settle, while serious injuries and major property damage can cost over £250,000 in total.

Indemnity limits

Third party liability insurance has an indemnity limit, which is the maximum amount that the insurance company will pay in the event of a claim. The standard indemnity limit is around £1 million, but you can select a higher limit for an additional premium. You may need a higher indemnity limit if it is a requirement of a contract with one of your clients, or you might decide you want this because the standard limit is insufficient given the nature of the work that you do.

The excess

Like many types of insurance, third party liability insurance usually contains an excess, which is the amount that you will need to contribute if you make a claim. 

It is important to note that even if your insurance company successfully defends a compensation claim made against you and nothing has been awarded to the claimant, there will still have been costs incurred. This means that you might have to pay an excess even if the compensation claim made against you is invalid.

Alternative covers you might need

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 of this nature is made against you.

Professional indemnity insurance

Public and products liability insurance protects 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.

So there you have it: third party liability insurance explained. Get a quote from Tradesman Saver today to make the first step towards securing your own third party liability insurance policy.