First Party vs. Third Party Liability

The difference between first party and third party liability is essential to protecting a business properly. This is one thing that many business owners frequently neglect. Many business owners see insurance as a fixed cost. Others see it as some sort of tax. Considering some of the coverages are required by law in most states it is easy to understand why some business owners look at them this way. They are also part of your overall plan to protect the long term viability of your business. At least they should be. Protecting your business from both first party and third party liability is essential to properly protecting your business.

First Party vs. Third Party Liability

The most basic example of the contrast between first and third party liability is in the four types of coverage most businesses purchase. Some of these policies are even required by law in nearly every state. These first two coverages are commercial property and commercial auto and they are examples of First party coverage. The legally required coverages are workers’ compensation and general liability and they are examples of Third party coverage. The first two represent first party coverage because they cover damages to you and your business. This would also include a coverage like inland marine coverage. The second two policies represent third party coverage because they protect your business from the third party liability to other people and organizations.  This is covers damages caused by you or your business to third parties. Third parties can include customers, vendor partners or anyone damaged by the actions of your business.

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Workers’ Compensation and General Liability are required by law for most businesses in most states because they are liability to third parties. If businesses chose not to secure these coverages and then accidents were to occur, the only course of action for the victim would be to take the liable business to court. Because of these requirements they are frequently referred to as the ‘Exclusive Remedy’.

Other policies like those that cover a Data Breach are typically sold in tandem. Data Breach insurance is usually paired in combo as Cyber Security and Cyber Liability.  Cyber Security,  also commonly known as Privacy Notification and Crisis Management Expense Coverage,  protects damage to you and your business that result from a data breach. These costs are commonly referred to as the ‘immediate response costs’.  They could include, notifying all customers damaged by the breach, hiring a forensic expert to find the source of the breach, providing credit monitoring for those victims for up to one year (required by law in most states) and hiring a public relations firm to restore your businesses tainted image.  Cyber Liability covers your liability to third parties. These third parties can include customers, vendors or anyone else damaged by your business as a result of the data breach.