What is the Difference Between a First-Party Insurance Claim and a Third-Party Insurance Claim?
The difference between a first-party insurance claim and a third-party insurance claim is who you are submitting the claim to and what duties they owe you as a result. If you are making a claim against your own insurance company, it is a first-party claim. If you are making the claim against someone else’s policy, it is a third-party claim. A major difference between first-party insurance vs third-party insurance is that the insurer owes you certain “fiduciary” duties that are implied by the first-party insurance contract you purchased from them. Meaning they have to treat you fairly as defined under the Insurance Code. In a third-party claim, the insurer does not have a direct relationship with you and, thus, does not have the same fiduciary duties.
What is a First-Party Insurance Claim?
First-party insurance is insurance that covers the losses of the person named on the policy. The policyholder may be a company, an individual, or a group of individuals of a particular class such as employees of a company, a person’s family, or occupants of a particular vehicle. A first-party claim is when the policyholder makes a claim against their own insurance policy. Some examples of first-party insurance are:
- Personal injury protection coverage under an automobile insurance policy
- Medical or health insurance
- Medical payment coverage under an automobile or homeowner’s policy
- Uninsured or underinsured motorist coverage under an automobile policy
- Damage to covered personal or business property for wind, storm, hail, fire, flood, or other disasters
- Renter’s wall-in insurance coverage
What is a Third-Party Insurance Claim?
Third-party insurance is insurance that is purchased to protect a person against liability for damages or losses that they caused. The policyholder may be a company, an individual, or a group of individuals of a particular class (such as employees of a company, a person’s family, or occupants of a particular vehicle). A third-party claim is when someone makes a claim against someone else’s insurance policy. Some examples of third-party insurance are:
- Liability insurance coverage under an automobile policy
- General commercial liability coverage
- Homeowner’s liability coverage for personal injury caused by the insured
- Umbrella insurance policies
- Commercial motor vehicle liability coverage
- Animal or canine liability insurance
- Professional liability insurance
- Public liability insurance
- Product liability insurance
- Directors’ and officers’ liability insurance
How are First-Party Insurance Claims and Third-Party Insurance Claims Different?
Under a first-party insurance claim, the insured makes a claim directly against their own insurance company and what they are entitled to recover is defined by the terms of the policy. Because the policy is a contract between the insured and the insurance company, it carries with it certain duties and obligations such as the duty to act in good faith. It is a fiduciary-type relationship that is regulated by the State of Texas under the Texas Insurance Code.
Failure of the insurance company to honor the terms of the policy may result not only in a breach of contract but also a violation of the duty of good faith and fair dealing. These violations could subject the insurer to penalties such as treble damages and/or 10% interest on the funds wrongfully withheld.
Under a third-party insurance claim, the person making the claim (“claimant”) is not the insured. The claim is made against the insured party, not the insurance company itself. As a result, the insurance company has no contract with the claimant and owes no duties to the claimant to act in good faith or otherwise. Instead, all duties are owed to the insured.
Thus, if the insurance company fails to handle the claim in good faith, the policyholder, has a potential cause of action against the insurance company. This cause of action only comes into existence if:
- The claimant (or his attorney) sends a Stowers Demand Letter,
- The insurance company fails to settle the claim resulting in a verdict higher than the policy limit,
- And a jury determines in a subsequent trial that the adjuster failed to act with the same degree of care in settling the claim as he would have in the management of his own affairs.
What is a Bad-Faith Insurance Claim?
The Texas Insurance Code regulates the treatment of insured policyholders by the insurance company. Violations of these rules by an insurance company are insurance bad faith. If an insurance company acts in bad faith, the insured can file a claim for these bad faith violations. A few examples of insurance companies acting in bad faith include:
- Deceptive practices: This happens when the insurance company fails to disclose the existence of coverage, fails to notify you of a claim filing deadline or fails to provide the paperwork required to file.
- Unreasonable delays: Insurance companies may intentionally drag out the time it takes to investigate a claim before agreeing to pay.
- Misrepresenting the law or policy language: This happens when the insurance company deliberately interprets a policy against a claimant’s interest. Insurance companies must be truthful in their statement about policies and the law.
- Refusing to pay: If the insurance company refuses to pay a claim that should be covered by the policy this can qualify as bad faith.
- Failing to conduct a complete investigation: An insurance company must conduct a prompt and thorough investigation into a policyholder’s claim.
- Offering less money than a claim’s value: Low-balling or offering far less money than the value of a claim is insurance bad faith.
- Threat-based language: Any threatening statements to the insured or third party.
Thus, whether you are dealing with first-party insurance vs third-party insurance is important because it determines what your rights are when the insurance company fails to diligently resolve your claim.