What Is Third-Party Liability Insurance & Do You Need It?
When you first start dreaming about your small business, it’s fun to think about grand openings, happy customers, and meeting your financial goals. However, before doors open or those first paychecks go out, it’s important to address some of the less-fun parts of your business, like risk management.
One of the most basic types of business insurance you can purchase to protect your business is third-party liability insurance. Read more to find out if third-party liability insurance is the right fit for your needs.
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What Is Third-Party Liability Insurance?
A third-party is a person unrelated to your business. So, third-party liability insurance protects your business from lawsuits, claims, and damages when a third-party is injured at your place of business. A third-party liability plan might be included in a business owners plan (BOP) which bundles general liability, commercial property, and sometimes business interruption service.
According to the government, up to 53% of small businesses experience a lawsuit. If a third-party — customer, visitor, contractor — injures him/herself at your business, this is the insurance coverage you’ll need to avoid devastating financial claims against your company. 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 damage and medical bills, this policy protects against the financial damage of litigation.
Third-party liability insurance is an add-on to your general liability, commercial property, or commercial auto plan. Ask about third-party liability coverage when you meet with an insurance professional to discuss your needs.
What Third-Party Liability Insurance Covers
Third-party liability insurance is a specific policy that covers third-party injuries, and damages and claims relating to a third-party injury.
- Bodily Injury To Someone Or Property Damage Because Of Your Business/Employees: If a customer slips and falls on a spilled margarita or your contractor breaks a client’s toilet while working at their home, this insurance will cover the medical bills for your customer, legal costs to defend yourself in a lawsuit, and repairs.
What Third-Party Liability Insurance Doesn’t Cover
Third-party liability is a special add-on bundled into a business owners policy, commercial property plan, or a commercial auto plan. However, there is a lot that a third-party plan doesn’t cover. Here are some of the things that should be covered through other insurance policies:
- Negligence: If it’s proven that accidents happened because of your own negligence, it is quite possible the insurance company will not pay the claim.
- Fire/Flood/Property Damage Sustained From A Natural Disaster: Some natural disasters are covered under commercial property insurance. (Flood and earthquake are often extra endorsements.)
- Protection From Giving Bad Advice: If having clients and giving advice is part of your business model, this insurance protects you from a lawsuit that’s a result of your bad advice. Honestly, why doesn’t this insurance exist for everyday life? I don’t know.
- The Loss Of Income If You Need To Close Your Doors: Business interruption insurance will help with lost income and the cost of relocation if a disaster causes you to shut down your business (or if a leader property suffers damage).
- Vandalism: Damage to your building as a result of vandalism is 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 worker’s 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.
Who Is Considered A Third-Party?
A third-party is a person unrelated to your business. Every day, there are customers, contractors, and non-employees who might interact with your business. Essentially, a third-party is a legal term that represents someone affected by a company’s actions but not directly related to the company itself. Any insurance issues that involve members of your staff would not be covered a third-party liability policy.
How Third-Party Liability Insurance Policies Work
Let’s say someone slips and falls on your property and sues you. The third-party liability policy will pay for medical and legal bills. 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) is 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.
Which Insurance Policies Include Third-Party Liability Insurance?
Every insurance provider is different and the various bundles will vary. However, you may typically find a third-party liability endorsement as an addition to a commercial auto policy, a business owner’s policy, a general liability policy, or, sometimes, under your renters/homeowners insurance policy.
How To Buy Third-Party Liability Insurance
When you are ready to make a purchase, there are quite a few places to secure a general liability policy for your business. 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.
But with thousands and thousands of insurance carriers, how do you know which one will work well for you?
Most insurance companies carry a basic form of commercial general liability insurance with third-party liability. You can use a website like Coverhound, Coverwallet, or Insureon to enter your business information and receive comparison quotes.
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:
|Insurance Type||What It Does||Who It's For|
Often called "slip and fall" insurance, this insurance protects your business from the threat of a lawsuit.
Directors & Officers Liability
This insurance protects the company and its directors from frivolous lawsuits.
A business with figureheads that could attract legal attention
Protects your business from the costs of a data breach or hacking or other cyber crimes.
Businesses that gather information about clients and store it online
Protects your buildings and things inside your buildings from damage and accidents.
Businsses with a physical property site and products located in those physical locations
Protects a business from a lawsuit related specifically to the product it sells.
Any business that manufactures, sells, or distributes a product
Pays your workers salary and medical bills in the event of an on-the-job accident or injury.
All businesses with one or more employees
If your business has to stop because of property damage, this will cover the cost of moving your business to a new location.
Businesses that need a specific location to keep open
Talk with an insurance expert to see which policies are right for your business.
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 an important foundation for risk management. If you run a business that has customers, has a storefront, ships goods, or provides services, then adding a liability policy is a must.
We live in a society that is quick to litigate and assumes businesses are covered by insurance when, in fact, many are not. At the bare minimum, consider a general liability policy with a third-party liability endorsement.
How Much Does Third-Party Liability Cost?
As with all insurance policies, the cost will be determined by the type of business you run and the amount of coverage you think you’ll need. However, since third-party liability is the most basic and foundational form of insurance, it is not terribly expensive.
According to CoverWallet, the average monthly price for general liability is between $40-100 per month. Some of the things that may affect that 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
- The location of your business
According to the Insurance Journal, in 2015 the average cost of a “slip and fall” lawsuit was around $20,000. If you don’t have that sort of money lying around to pay for medical and legal fees, then a policy for as little as $400 a year is not just a needed business expense, it is imperative. Third-party liability, which protects others from your mistakes, is a crucial part of your risk management plan.
The insurance industry might be in the business of worst-case-scenarios, but a liability insurance policy doesn’t have to set you back significantly and the protection it provides is priceless. This is especially true if you live in a state that is known to favor plaintiffs over small businesses in a court of law. Do your homework, research the best policy for your business and industry, and get covered today!