1st Party vs 3rd Party Insurance – What’s The Difference?

Posted on November 1, 2022

The difference between first-party and third-party auto insurance relates to who holds the policy and who receives its payments. First-party car insurance pays the policyholder compensation for covered losses. Third-party car insurance pays other people who have been hurt by the policyholder’s negligence. All states require motorists to carry at least a minimum amount of third-party insurance.

What is a first-party insurance policy?

A first-party car insurance policy is a contract between you, the policyholder, and the auto insurance company. You agree to pay car insurance premiums. The insurance company agrees to pay your losses that are covered by the terms of the policy.

Health insurance is the most obvious type of first-party insurance. Examples of first-party auto insurance are the following types of car insurance policies:

• comprehensive car insurance policies,
• uninsured / underinsured motorist coverage,
• Med Pay insurance, and
• personal injury protection (PIP) insurance.

These forms of insurance coverage pay for your losses in an accident, like property damage and medical expenses. In most cases, they apply to the whole vehicle. This means the insurance covers the losses of passengers in the insured vehicle, as well.

Because first-party car insurance makes your insurance provider cover your own damages and losses, it is often in your interest to have good coverage. Many drivers choose add-on covers to their two- or four-wheeler insurance plans for their insured car or motorcycle, like:

• zero-depreciation,
• roadside assistance, and
• return to invoice coverage.

The form of insurance is called “first party” insurance because you are the beneficiary of the contract. Insurance contracts refer to the parties involved in the following way:

• the first party is you, the policyholder,
• the second party is the insurance company, and
• the third party is everyone else.

How do first-party insurance claims work?

If you get hurt in an accident, you would file an insurance claim against your own insurance company. You would be entitled to a payout for losses covered by the insurance contract.

If your insurance company refuses to uphold its obligations under the contract by denying the claim, it can amount to insurance bad faith. You can then file a lawsuit against your insurer and demand your legal damages associated with the denial.

What is third party car insurance?

Third-party car insurance is liability insurance coverage. It protects the policyholder from liability claims by other people that the policyholder negligently hurt by paying for the losses sustained by these third parties. It also requires the insurance company to defend and indemnify the policyholder against claims covered by the policy.

In the auto insurance context, third party insurance is your:

• bodily injury liability policy, and
• property damage policy.

If you hit and hurt someone else in a car accident, the victim may file a personal injury claim against you. Under the terms of your third-party insurance coverage, your insurance company must:

• send an insurance adjuster to investigate the claim,
• determine fault for the accident,
• defend you against the lawsuit, including in court if that is necessary, and
• pay out the losses from a settlement or verdict, up to the policy’s limit.

Nearly all states require all drivers to have at least a certain amount of third party liability coverage in order to drive on the road. In California, for example, all car owners must have at least:

• $15,000 of bodily injury coverage per person in a crash,
• $30,000 of bodily injury coverage per accident, and
• $5,000 of property damage coverage.¹

This requirement means that all victims in car accidents should be able to count on the at-fault driver having at least some insurance coverage. Those victims can then rely on that source of compensation to cover their losses.

However, these minimum amounts for liability coverage often fail to cover the costs of even a moderately severe accident. When the policy limit is reached, that source of compensation runs dry. The victim will have to look elsewhere, including to the policyholder’s personal assets.

How do third-party insurance claims work?

A third-party insurance claim is an insurance claim that is filed against someone else’s insurer. After a car accident, it is generally filed by the victim of the accident against the at-fault driver’s auto insurance company. It demands that the at-fault driver’s insurer cover the victim’s costs under the liability coverage of the insurance policy.

These third-party claimants are not privy to the insurance contract. As such, the car insurance company does not owe them a duty of good faith and fair dealing. The only party that the insurance company has to deal with in good faith is the policyholder. This means that, in a third-party insurance claim, the only party that can make a bad faith insurance claim against the insurer is the policyholder or vehicle owner. They can make a bad faith claim if the insurance company did not uphold its contractual duty to defend and indemnify the policyholder.

What is insurance bad faith?

All parties to a contract have a legal obligation to behave in good faith and deal fairly. This includes the expectation that they will fulfill their obligations under the contract.² This includes insurance policies, which are contracts between the insurance company and the policyholder.

If the insurance company does not behave this way towards the policyholder, it can amount to bad faith insurance. Some common examples of bad-faith insurance are:

• refusing to defend a policyholder against a third-party claim filed by someone who was hurt by the policyholder’s driving,
• not promptly investigating a claim,
• denying a first-party insurance claim that is covered by the policy,
• unreasonably delaying the payment of a claim, and
• misrepresenting the policy’s benefits and scope of coverage.

Victims of bad faith insurance practices can sue their insurance company. They can recover compensation for the losses they have experienced from the incident. A personal injury lawyer from a reputable law firm can help.

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