Third-party insurance is a type of insurance where one party (the insured) pays premiums to an insurance company (the second party) in return for protection against claims filed against the insured by a third party. Third-party insurance generally comes in the form of liability insurance, or casualty insurance, and covers instances of bodily injury or property damage. For example, car insurance is a common type of third-party insurance that protects drivers against claims of other drivers in case of an accident.

Third-party insurance is found primarily in auto, homeowners, and business liability insurance policies. Each type of insurance serves a slightly different purpose. Auto insurance, for example, can protect the insured against liability losses that affect someone else, such as another driver on the road. Without this type of coverage, insureds would be left to try and pay for the damages out of their own pockets, which is usually not possible.

In most countries, third-party or liability insurance is compulsory for any party sued by a third party. Public liability insurance involves industries or businesses that take part in processes or other activities that may affect third parties, such as subcontractors, architects, and engineers. Here, the third party can be visitors, guests, or users of a facility.

Third-party insurance is important because it offers the insured coverage for injury or damage they have caused to another person or business. Without third-party insurance, a person or business could end up paying extremely high damages to someone they have injured, whether or not the injury was intentional.

In summary, third-party insurance is a type of insurance that protects the insured against claims filed against them by a third party. It is commonly found in auto, homeowners, and business liability insurance policies and is important because it offers the insured coverage for injury or damage they have caused to another person or business.