Third party refers to a person or entity (company) who is not you or the insurance company.
Yes, for your financial wellbeing it is important to purchase insurance and transfer your risk effectively. Although there is no law requiring this insurance for recreational users, a lawsuit could significantly impair you and your family financially.
Bodily injury to others as a result of your drone coming into contact with a person is an unfortunately common accident which can lead to lawsuits. Other claims arise from property damage caused by your drone, whether as a result of your piloting or mechanical failure, can lead to claims.
The Insurers will pay for all sums which the you become legally liable to pay, and will also pay, as compensatory damages (including costs awarded against the Insured) in respect of accidental bodily injury (fatal or otherwise) and accidental damage to property caused by the drone or by any object falling therefrom.