What is the Difference Between First-Party Insurance vs Third-Party Insurance?
September 6th, 2017
What is First Party Insurance?
First-party insurance is insurance that is purchased to cover the named policy holder (“insured”) against damages or losses suffered by the policy holder to his person or property. The policy holder may be a company, an individual or group of individuals of a particular class (such as employees of a company, a named insured’s family or occupants of a particular vehicle). Some examples of first-party insurance are:
- personal injury protection coverage under an automobile insurance policy
- 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 disaster
- renter’s wall-in insurance coverage
What is Third-Party Insurance?
Third-party insurance is insurance that is purchased to protect the named policy holder against liability for damages or losses caused by the named insured to another’s person or their property. The policy holder may be a company, an individual or group of individuals of a particular class (such as employees of a company, a named insured’s family or occupants of a particular vehicle). 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 causes 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 and Third-Party Insurance Different?
Under first-party insurance, the insured makes a claim directly against his own insurance company and what he is entitled to recover is defined by the terms of the contract. Because the contract is made between the insured and the insurance company directly, it carries with it certain fiduciary duties and obligations owed by the insurance company to the insured such as the duty to act in good faith. It is a fiduciary-type relationship. Additionally, that relationship is regulated by the State of Texas under the Texas Insurance Code. Failure of the insurance company to honor the strict terms of the contract may result not only in a breach of contract, but also violations of the duty of good faith and fair dealing as well as other duties that are set forth under the Texas Insurance Code. These violations could subject the insurer to penalties such as treble damages and/or 10% interest on the funds wrongfully withheld.
Under third-party insurance, the person making the claim (“claimant”) is not the insured. The claimant’s claim is 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 insured, not the claimant, has a potential cause of action against the insurance company. This cause of action only comes into existence if the claimant (or his attorney) send a Stower’s 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.