Property and Casualty Insurance Practice Exam

What defines third-party losses?

1. Losses sustained by the insured

2. Losses where the insurance company is the first party

3. Liability losses involving the insured, insurance company, and an injured person

4. All losses covered under a general liability policy

The correct answer is: Liability losses involving the insured, insurance company, and an injured person

Third-party losses are specifically characterized by the involvement of three parties: the insured (the individual or entity that holds the insurance policy), the insurance company (the insurer), and the injured party or claimant. In this context, when a loss occurs that requires compensation to an outside party due to the actions or negligence of the insured, it is categorized as a third-party loss. This often manifests in liability scenarios where the insured may be held responsible for causing damage or injury to someone else, hence triggering the insurer's obligation to provide coverage for that claim. This definition fits neatly into the framework of a liability insurance policy, which is designed to protect the insured against claims made by third parties. It differentiates third-party losses from first-party losses, where the insured experiences a loss directly affecting them, and ensures that the understanding of who is involved in the claim process is clear. Consideration of the other descriptions helps clarify the focus on third-party losses. Losses sustained by the insured directly pertain to their own damages and do not involve a claim made by an external party. While the insurance company being a first party is accurate in general discussions about insurance roles, it does not specifically address the concept of third-party losses. Lastly, while a general liability policy indeed