What Is Third-Party Car Insurance, and Do I Need It?

In most cases, you pay a premium to get coverage for yourself and your property. However, when you buy liability auto insurance, your coverage pays for someone else's losses, even though they've never paid a single premium for or had a contract with your insurance company. There's a name for coverage that does this: third-party insurance.

Third-party car insurance protects the policyholder — not by paying for their own damages, but instead by paying for losses they cause to others. This way the policyholder doesn't end up having to personally reimburse those other people.

Having third-party auto coverage is required in most states. Since you'll likely need to purchase it, it's helpful to understand exactly how it works.

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What is third-party car insurance?

When I was involved in a car accident years ago, the other driver was at fault. Their insurance company paid my bills. While this is standard in most parts of the country after a car crash, it's actually kind of unusual when you think about how insurance typically works.

Third-party car insurance is better known as liability car insurance because it pays for the losses you're legally responsible for. This includes damages to others because you caused a car accident. Here's an explanation of who each "party" refers to in an auto insurance claim:

You (the driver or policyholder) are the first party who signs up for the insurance coverage, pays premiums for it, and is involved in an accident.
The insurer is the second party who enters into a contract with you and agrees to pay for damages you cause in an accident.
The third party is the crash victim who isn't a party to the insurance contract or involved in buying the policy. They can receive funds for damages from the third-party claim made if you injure them or damage their property in an auto accident.

Most states require that you buy two kinds of third-party insurance:

Bodily injury liability insurance: This pays for costs related to the injuries an accident victim experiences if you're responsible for causing a crash that harmed them.
Property damage liability insurance: This pays for property damage you cause to others, such as if you crash into their car or building and damage it. I took advantage of this coverage when I made a claim with the insurer of the driver who hit my vehicle.

When a crash victim makes a third-party claim, the insurer will either accept responsibility and pay the amount due to the victim (up to policy limits), deny responsibility, or lowball the amount it's willing to pay. If the third-party crash victim isn't happy with what the insurer wants to pay, that victim can file a civil lawsuit to try to recover more money.

Bodily injury coverage

Your bodily injury liability coverage pays for various expenses resulting from injuries you cause crash victims when you're legally responsible for the accident. These include:

Legal fees you (the first party policyholder) have to pay if you're sued
Medical expenses incurred by the victim who needs treatment due to the crash
Lost income for the third-party crash victim if the injuries impact their ability to work temporarily or permanently
Compensation for the victim's pain and suffering
Compensation for the emotional distress the victim has experienced
The victim's funeral costs if the accident you cause is fatal

Remember that this insurance won't pay for your own medical bills or those of your passengers. Other types of insurance, like personal injury protection or medical payments coverage, do that.

Property damage coverage

Property damage liability coverage pays for damage you do to someone else's property, such as:

Repairs to the vehicle you crashed into
Replacement of a vehicle you crashed into if you damage it so badly that it's declared a total loss
Repair or replacement of someone's building, fence, telephone pole, or other non-vehicle property

This type of coverage doesn't pay for your own property damage. If you want coverage for your own vehicle's repairs or replacement, you'll need to buy extra types of insurance coverage, including collision and comprehensive coverage.

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How third-party car insurance works

The specifics of how third-party car insurance works will depend on whether you're in a fault or a no-fault state. However, in both types of states, third-party insurance usually won't pay for theft, vandalism, or weather-related damage — only crash-related losses.

How third-party car insurance works in fault states

Most states are fault states. This means in the aftermath of any accident, whether it causes serious harm or not, crash victims can make a claim against the other driver's insurer if the other driver was fully or partly to blame.

This is what happened in my accident. Someone else crashed into my car and damaged my property, and I made an insurance claim. Here's how I did it and how you'll do it as the crash victim in an accident that another driver caused:

Get the at-fault driver's details at the crash scene: These include their driver's license, car registration, and insurance information, as well as their contact details. You may also wish to call the police so they can investigate what happened and write an accident report, which could be helpful evidence for getting compensation later.
Call your own insurance company: Even if your insurer shouldn't be footing the bill, it still needs to know about the accident. Your insurer will usually make a claim with the third-party insurer for you.
Wait for the insurance companies to determine who's at fault: Often, this is very straightforward. If it isn't in your case, it may become necessary to file a civil lawsuit so each side can present its evidence. A court can then decide who must pay for damages.

In my case, the other driver's insurer paid the fair market value of my car. The insurer paid me (a third party) because the driver (the first party) had purchased liability insurance to avoid having to pay me out of his personal assets for the damage he did.

If I had been hurt, which thankfully I wasn't, the other driver's insurer would also have had to pay for my medical bills, lost wages, pain and suffering, and emotional distress, up to policy limits.

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How third-party car insurance works in no-fault states

Twelve states are no-fault states, including Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, and Utah.

In these states, drivers recover compensation from their own insurer for injuries in minor accidents. They make a first-party claim under a type of coverage called personal injury protection, which they're typically required to buy, and it pays for medical bills and lost wages. They do this instead of a third-party claim (with the insurer of an at-fault driver).

Even in no-fault states, having third-party car insurance is important. That's because crash victims can still file a property damage claim against a driver who caused a crash. So, drivers generally need to purchase property damage liability coverage to cover these losses.

If injuries rise to a certain level of seriousness, crash victims can also pursue a third-party claim for injuries. The at-fault driver would want to ensure they have third-party liability coverage in case that happens to avoid potentially being out millions of dollars.

Do you need this type of car insurance?

Third-party car insurance is one of the most important types of car insurance you need. That's because most states require this coverage, and if you don't have it, you could face legal consequences for driving without insurance. You could also be on the hook for a huge amount of money if you harm others or damage their property.

The specific amount of third-party car insurance you need can vary by state. It's common to need a minimum of $25,000 per person and $50,000 per accident in bodily injury liability coverage, and most states also require a minimum of $10,000 to $25,000 in property damage liability protection. Some require less or more than these amounts.

Drivers may want to buy more than the minimum policy coverage to better protect their assets. Without enough insurance, a sued driver could potentially have to go to court without the insurer continuing to pay the bill. You may also get stuck paying for some of the victims' car accident losses out of pocket if the damages exceed your policy limits.

Other coverage types you might need

There are many different car insurance types that you should consider buying beyond just purchasing third-party car insurance, such as:

Collision: Collision coverage pays for damage to your own car if there's a crash that another driver didn't cause, like if you hit a fence.
Comprehensive: Comprehensive coverage pays for non-crash damage, such as from a hailstorm or a fallen tree.
Uninsured/underinsured motorist: This pays for losses the other driver should have covered if they harmed you in an accident, but couldn't because they had too little or no insurance coverage.
Medical payments: This coverage pays for medical bills if you or your passengers are hurt.
Personal injury protection: If you're in a no-fault state, you usually need this coverage to pay for medical bills and lost wages you experience if you're hurt in a minor accident.
GAP insurance: This coverage pays the difference between what you owe and the fair market value of your car if your car is totaled in an accident or stolen. This is important if you have a loan or lease since the insurer typically only pays out the car's fair market value, which may leave you owing your lender or lease provider more money.

Buying extra coverages, including collision and comprehensive, means you have a full coverage policy. If you buy only the required liability insurance, you have a liability-only policy.

How much does third-party insurance cost?

It's helpful to understand average car insurance costs so you can make sure you're paying a fair price for your policy. The overall national average cost of a liability-only car insurance policy is $106 per month, according to Insurify data. However, different insurers charge different prices.

The table below shows average premiums for third-party insurance from major insurers for a driver with a clean driving record.

Insurance company	Average monthly liability-only premiums
Allstate	$66
Auto-Owners	$38
GEICO	$111
Nationwide	$90
Progressive	$105
State Farm	$55
Travelers	$95
USAA	$50
Data provided by Insurify

Factors affecting third-party insurance costs

Your premiums could be close to the amounts above or be much higher or lower. That's because premium costs depend on many individualized factors, including:

How risky insurers see you as a driver: If you have traits that make you high risk, such as being a single young male or having a history of speeding tickets or past crashes, you'll pay higher premiums because insurers feel like you're more likely to crash and make a claim.
Your coverage limits and types of coverage: The more coverage you buy, the higher your premiums, but the more protection you'll have later.
Your deductible: This is what you pay out of pocket if you have a covered claim. A higher deductible comes with lower premiums but potentially more money out of your pocket later.

Always shop around to find the best and most affordable coverage, as different insurers charge different prices for different drivers.

FAQs

How do I buy third-party car insurance?

Since most states require this coverage for drivers, you can buy third-party car insurance from any insurance company. It's sold as bodily injury and property damage liability coverage.

How can I save on my third-party car insurance?

You can save on third-party car insurance by shopping around to compare coverage options and making sure you drive safely to maintain a clean driving record. You should also ask your insurer about discounts.

Should I get third-party or full coverage insurance?

In many cases, you should get full coverage auto insurance. It includes third-party coverage in case you hurt others, as well as first-party coverage that pays for your own damages if something happens to your vehicle.

How do I file a third-party car insurance claim?

You should tell your insurer about the accident, and they will typically file the claim on your behalf. You can also contact the other driver's insurer directly, as long as you've obtained their contact details.

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Bottom line

Third-party car insurance is very important for drivers to purchase. Your state probably requires that you have it, and even if that's not the case, you need it to ensure you don't have to personally pay for legal fees and another driver's damages if you were to cause an accident and they make a claim against you.

All auto insurers offer third-party liability coverage, so you should shop around for the best car insurance to find the right liability coverage at a fair price.

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