Definition:Third-party claim procedure
📋 Third-party claim procedure is the contractual mechanism within an insurance policy — or within the indemnity provisions of a sale and purchase agreement covered by W&I insurance — that governs how the insured must respond when a claim or demand is brought against the insured by an external party, as distinct from a claim the insured itself identifies and pursues directly. In liability insurance, D&O insurance, and transactional risk products, the procedure establishes a structured sequence of notification, cooperation, and defense obligations that the insured must follow to preserve its right to indemnification under the policy.
⚙️ A typical third-party claim procedure requires the insured to notify the insurer or underwriter promptly — often within a specified number of days — upon becoming aware of a claim, threatened claim, or circumstances that could give rise to a claim from a third party. The procedure then addresses who controls the defense: whether the insurer has the right to appoint counsel and direct the defense strategy, or whether the insured retains conduct of the defense subject to the insurer's oversight and consent rights regarding settlement. Many policies require the insured not to admit liability, make payments, or settle the third-party claim without the insurer's prior written consent, as doing so could prejudice the insurer's subrogation or coverage position. In M&A insurance, the SPA's indemnity clause will often contain its own third-party claim procedure, and the W&I policy must dovetail with those provisions to avoid gaps or conflicting obligations.
🛡️ Adherence to the third-party claim procedure is not merely administrative — failure to comply can result in the insurer declining coverage or reducing the payout, depending on the jurisdiction and the specific policy wording. In the United Kingdom, the Insurance Act 2015 reformed the consequences of late notification, moving away from automatic forfeiture toward a prejudice-based test, while in many US jurisdictions the outcome depends on whether the policy is "occurrence" or " claims-made" and on applicable state law. Across Continental European and Asian markets, similar principles apply but with local variations in how strictly compliance is enforced. For brokers and risk managers, ensuring that clients understand and can operationally follow the third-party claim procedure is one of the most important pieces of post-placement advice.
Related concepts: