What Is Third-Party Car Insurance?

Car accidents happen, and without auto insurance, you could face huge out-of-pocket costs. That’s why third-party car insurance exists, to cover damage you cause to others without overpaying for extra coverage.

During my 9 years in the industry, I’ve seen insurance costs rise, making this an affordable option for many drivers.

How Does Third-Party Insurance Work?

Third-party car insurance covers damage you cause to others, but how it works depends on your state’s insurance laws.

At-Fault vs. No-Fault States

• At-Fault States: The driver responsible for the accident must pay for the other party’s damages. Third-party insurance covers their medical bills & repairs.
• No-Fault States: Each driver uses their own insurance for medical expenses, regardless of fault. Third-party insurance still covers property damage but not medical costs (which are covered by Personal Injury Protection (PIP)).

There are twelve states that are no-fault:

• Florida
• Hawaii
• Kansas
• Kentucky
• Massachusetts
• Michigan
• Minnesota
• New Jersey
• New York
• North Dakota
• Pennsylvania
• Utah

What Does Third-Party Insurance Cover?

Bodily Injury Liability (BI)

• Covers medical expenses, lost wages, and legal fees for the other driver & passengers.
• Pays funeral expenses in case of fatal accidents.

Property Damage Liability (PD) 🚘🏠

• Covers damage to the other driver’s car.
• Pays for damage to homes, buildings, fences, street signs, and landscaping.

Example Scenario Of How Third-Party Car Insurance Works

Third-party insurance protects both drivers—it covers damages for the victim while saving the at-fault driver from paying out-of-pocket. Let’s break it down:

Scenario: A Distracted Driving Accident

The Situation:

• Driver A is stopped at an intersection, waiting to turn left.
• Driver B is distracted and rear-ends Driver A’s truck.
• The accident causes damage to the truck and a back injury to Driver A.

What Happens in a No-Fault State?

• Property Damage: Driver A files a third-party claim with Driver B’s insurance to cover truck repairs.
• Medical Expenses: Driver A uses their own Personal Injury Protection (PIP) coverage for medical bills.
• Driver B’s Insurance: Only pays for vehicle damage—not medical costs.

Example: In Florida (a no-fault state), PIP covers 80% of medical expenses, up to $10,000.

What Happens in an At-Fault State?

• Investigation Determines Fault: The insurer confirms Driver B was distracted and caused the accident.
• Third-Party Payouts: Driver B’s third-party insurance pays for:
  • Truck repairs (property damage liability)
  • Medical expenses (bodily injury liability)
  • Lost wages from missed work
•  Driver A doesn’t pay anything out-of-pocket for these costs.

Example: In Texas (an at-fault state), bodily injury liability must cover at least $30,000 per person in medical bills.

How Much Does Third-Party Insurance Cost?

Third-party insurance is at its heart liability-only insurance, covering bodily injury and property damage. In most states this type of policy is affordable. The national average cost is $3,017.

The cost can vary when you add additional coverage such as Collision and Comprehensive, or if you are carrying a lease and require Full Coverage.

Third-party insurance costs will depend on your location, the type of vehicle driven, and coverage level selected. Each state has its own standards, and thus its own costs.

Claims Process For Third-Party Car Insurance

If you’re involved in an accident and the other driver is at fault, you may file a third-party insurance claim with their insurer. Here’s how the process works:

Step 1: Collect As Much Information As You Can.

Remember details are important to insurance companies.

Driver & Vehicle Details:

• Names, contact info, and insurance details of all drivers involved.
• Vehicle make, model, year, and license plate number.

Accident Scene Information:

• Location details (street name, intersection, traffic signals).
• Weather & road conditions (wet roads, poor visibility).
• Photos/videos of damages (cars, skid marks, street signs, injuries).

Police Report & Witness Statements:

• Call the police, even for minor accidents. Their official report helps determine fault.
• Get witness names and statements, if available.

Step 2: Contact the At-Fault Driver’s Insurance Company

• Notify their insurer and start the claims process.
• Provide your evidence, police report number, and witness details.
• Some insurers may require a statement about the accident.

Step 3: Get A Repair Estimate

• The insurance company may require an inspection before approving repairs.
• Some insurers prefer in-network repair shops, while others allow you to choose your own shop.
• If needed, get multiple repair estimates and submit them for approval.

Step 4: Settlement & Payment

• Once the insurer confirms fault, they’ll cover:
• Vehicle repair costs (up to the policy’s property damage limit).
• Medical expenses & lost wages (if bodily injury liability applies).
• If the insurance company denies or delays payment, you may need to negotiate or involve an attorney.

Benefits Of Third-Party Insurance

Third-party car insurance protects you from costly out-of-pocket expenses while keeping you legally compliant. Here’s why it’s beneficial:

Legal Compliance

• In most states and countries, third-party insurance is legally required.
• Driving without it can result in fines, license suspension, or vehicle impoundment.

Financial Protection

• Covers vehicle repairs, medical bills, and property damage for the other party.
• Without it, you could be personally liable for thousands of dollars in damages.

Protects Against Lawsuits

• If you cause an accident, third-party insurance helps cover legal fees if the other party sues you.
• Bodily injury liability coverage can help settle claims out of court, avoiding costly lawsuits.

Affordable Compared to Full Coverage

• Third-party insurance is significantly cheaper than full coverage.
• Ideal for drivers with older vehicles or those looking for a low-cost insurance option.

Example: If you rear-end another car, your third-party insurance pays for their repairs and medical bills—without it, you’d be responsible for all costs out of pocket.

Who Needs Third-Party Insurance?

In nearly every U.S. state, third-party car insurance (liability coverage) is legally required. The only exceptions are New Hampshire and Virginia, where insurance is not mandatory, but drivers must prove they can pay for damages in an at-fault accident.

Third-Party Insurance by State:

• Mandatory in 48 states – Drivers must carry bodily injury liability & property damage liability.
• Not required in New Hampshire & Virginia – Instead, drivers must either:
  • Pay an uninsured motorist fee (VA only).
  • Prove financial responsibility (show assets that can cover damages).

In addition to auto third-party insurance, homeowners and businesses have their own forms of third-party insurance.

Third-party liability insurance extends beyond auto insurance, it also protects homeowners, businesses, and professionals from lawsuits.

Homeowners Insurance (Liability Coverage)

• Covers injuries on your property (e.g., a guest slipping on ice).
• May cover accidental damage you cause to someone else’s property.

Business Liability Insurance

• Protects businesses from customer injuries & product liability claims.
• Essential for restaurants, retail stores, and service-based businesses.

Rideshare & Delivery Drivers

• Uber, Lyft, and DoorDash drivers need special third-party auto coverage.
• Standard car insurance may not cover business-related accidents.

How To Buy Third-Party Car Insurance

Third-party car insurance is included in most standard auto policies because it’s legally required in 48 states. However, coverage limits vary by state, so it’s important to check your policy carefully before purchasing.

Steps to Buying Third-Party Insurance

Step 1: Confirm Your State’s Minimum Coverage Requirements

• Each state has different liability insurance limits for bodily injury & property damage.
• Example:
  • California: Minimum $15,000 per person, $30,000 per accident (BI) and $5,000 (PD).
  • Texas: Minimum $30,000 per person, $60,000 per accident (BI) and $25,000 (PD).
  • Check your state’s insurance department website or ask your insurer.

Step 2: Choose the Right Liability Limits

• Just because state minimums exist doesn’t mean they’re sufficient.
• Higher liability limits protect you from paying out-of-pocket if you cause a major accident.

Step 3: Get Quotes from Multiple Insurers

• Use insurance comparison tools or speak with different providers.
• Consider factors like premium cost, claim satisfaction, and coverage add-ons.

Step 4: Verify Your Policy’s Coverage Before Finalizing

• Ensure bodily injury & property damage liability meet your state’s requirements.
• If leasing a car, check if your lender requires full coverage (which includes third-party insurance + collision + comprehensive).