Third-party insurance protects policyholders from claims by other people (“third parties”). It differs from “first-party” insurance such as health insurance or a California “Med Pay” policy, which covers losses sustained directly by the policyholder.
Common types of third-party insurance in California include bodily injury car liability insurance, homeowner’s premises liability insurance and medical malpractice insurance. These policies protect a policyholder when a third party is injured as the result of the policy holder’s negligence.
To help you better understand third-party insurance, our California personal injury lawyers discuss, below:
- 1. What is “third party” insurance?
- 2. What types of third party car insurance are available in California?
- 3. Does liability insurance cover damages to the policyholder?
- 4. How does a California auto liability policy protect a driver?
- 5. Bad faith by a third party insurer in California
- 6. What are subrogation and reimbursement rights of an insurer?
Third-party insurance is liability insurance purchased by a policyholder (the “first party”) from an insurer such as an auto insurer (the “second party”). The first and second parties are the parties to the contract of insurance (the “policy”).
The policy covers situations in which the first party is accused of causing a loss to someone who is not a party to the contract (a “third party”).
Example: Julia suffers a “slip-and-fall” accident while waiting tables at a cocktail lounge. She makes a worker’s compensation claim against her employer (the cocktail lounge).
In this example, the cocktail lounge is the first party. The cocktail lounge’s workers compensation insurer is the second party. The workers comp policy covers employees (third parties) if they are injured at work. It is third-party insurance.
There are two general types of third-party auto insurance that people can purchase in California:
- Bodily injury liability insurance, and
- Property damage liability insurance.
Bodily liability insurance covers wrongful death or injury to passengers, pedestrians and people in other vehicles.
Property damage liability insurance covers damage to other people’s property, including car repairs for their vehicle.
Both these types of liability insurance are mandatory for drivers and owners of motor vehicles in California.1
Third-party insurance does not cover damages experienced by a policyholder directly. It only covers claims for losses suffered by someone who is not a party to the contract of insurance.
For instance, a driver injured by an uninsured motorist cannot make a claim against his auto liability policy. For that, the driver needs “first party” insurance such as:
- Health insurance,
- Med Pay auto insurance,
- Collision and/or comprehensive insurance, or
- Uninsured / underinsured motorist coverage.
Third party insurance requires the insurance company to defend and indemnify policy holders against covered claims. This means that when a third party makes a claim for a covered loss against the policy holder, the insurer must in good faith:
- Promptly investigate the claim,
- Determine who was responsible for the accident,
- Defend the policy holder (in court, if necessary), and
- Pay out losses to the claimant (up to policy limits) that result from a jury verdict or out-of-court settlement.2
Example: Willie is driving home from work when he gets into a car accident with Lori. Lori makes a claim against Willie’s California auto liability policy.
Willie’s insurer must use good faith efforts to investigate the accident and defend Willie against Lori’s claims.
If the insurer then determines that Willie was at fault (or if Lily obtains a jury verdict in her favor) it must also pay Lori’s damages (up to Willie’s policy limits).
If the insurer fails to investigate or defend Willie’s claims and as a result Willie loses money, Willie may be able to sue the insurer for bad faith duty to defend under California law.
Third parties are extremely limited in their right to sue someone else’s insurer for bad faith in California. This means that even if an accident is the other person’s fault and the insurer refuses to pay damages, the injured third party has no right to sue the insurer for bad faith. The insurer’s only duty is to its policy holder.
Let’s go back to our example to see how this might play out.
Example: Let’s say that Lori’s compensatory damages (such as medical bills and car repairs) total $35,000. Willie’s auto insurer agrees that Willie caused the accident, but doesn’t think that Lori will sue for such a small amount.
As a result, the adjuster refuses to pay her. Lori has no right to sue the insurer for bad faith since she is not a party to the contract of insurance.
But… let’s say that Lori then sues Willie and Willie’s insurer refuses to defend him. Willie now has a cause of action for bad faith duty to defend by his insurer.
He can recover any damages he is forced to pay Lori, plus his lawyer’s fees and possibly punitive damages as well.
Most California insurers reserve reimbursement and/or subrogation rights under their policies of insurance. Reimbursement and subrogation rights give first-party insurers the right to be paid back if their insured eventually receives money from the third party who injured their insured.
These are complicated concepts so let’s take a look at them one by one.
A right to reimbursement entitles an insurer who has paid benefits to an insured to repayment if the insured later recovers damages from a third party. In essence, it prevents people from receiving double benefits when they are injured.
Example: While Lori is trying to recover damages from Willie’s auto insurer in the above example, she gets treated under personal health insurance policy. The policy gives the health insurer the right to be reimbursed if Lily recovers damage from a third party – in this case, Willie or his auto insurer.
When Lori eventually recovers a judgement against Willie – or enters into an out-of-court settlement with his auto insurer – she will be obligated to reimburse her health insurer for the amounts it has already paid to her doctors.
A right of subrogation is similar to a right of reimbursement except that it also gives an insurer the right to pursue a third-party recovery on its insured’s behalf.
Example: Let’s say that in the example we’ve been using, Lori has a collision policy with her own auto insurer.
After Willie causes the accident with Lori, Lori’s auto insurer pays a body shop $10,000 to repair Lori’s car. Lori’s insurance company has a subrogation right to go after the third party that causes the accident.
This not only gives Lori’s insurer the right to be paid back its $10,000 out of any judgment or settlement in Lori’s favor. It gives the insurer the right to “step into Lori’s shoes” and sue Willie or his insurer on Lori’s behalf.
Injured in an accident? Call us for help…
If you were injured in a car accident, or by a defective product or a dangerous condition on someone else’s premises, you may be entitled to significant damages from the other party or the party’s insurer.
Contact us to schedule a free consultation with an experienced California car accident lawyer.