The main difference between first-party insurance and third-party insurance is who gets paid by the insurer. First-party insurance pays the policyholder for his or her covered losses. Third-party insurance, also called liability insurance, pays the victim who has been hurt by the policyholder’s negligence. Nearly all states require vehicle owners to carry at least some third-party insurance.
What is first-party insurance coverage?
First-party insurance is a contract between you and the insurance company. You pay your insurance premiums. The insurance company pays for losses covered by the terms of the policy, up to the policy limits.
It is called “first-party” insurance because you are paid by the coverage. The parties to insurance contracts are the:
- first party, or policyholder,
- second party, or the insurance company, and
- third party, or everyone else.
Examples of first-party insurance coverage are:
- health insurance,
- comprehensive car insurance policies,
- Med Pay insurance coverage,
- personal injury protection, or PIP, coverage, and
- underinsured / uninsured motorist coverage.
Because the coverage pays for your own damage, it is generally in your interest to have as strong of a first-party insurance policy as you can.
What is a third-party insurance policy?
Third-party insurance is also a contract between you and the insurance company. However, you pay your premiums in exchange for coverage from liability claims filed by third parties. That coverage requires the insurer to defend and indemnify you against claims covered by the policy, up to the policy limits. The liability claims are those that can be filed by third parties that you have hurt through your negligence.
This type of coverage is also known as liability insurance coverage.
Examples of third-party insurance coverage are:
- bodily injury liability policies in car insurance coverage,
- your car insurance coverage for property damage,
- professional liability insurance, also known as errors and omissions coverage,
- legal or medical malpractice insurance, and
- liability provisions in homeowners’ insurance policies.
For example: Dr. Jones makes a mistake during a surgery that hurts the patient. The patient sues for medical malpractice. Dr. Jones’ medical malpractice insurance company has a duty to defend the doctor against the claim. When the case settles, the insurance company pays the settlement amount, up to the policy’s limits.
Just like with first-party insurance, it is generally wise to carry as much third-party insurance as you can. Higher policy limits benefit you by protecting your assets from a legal claim. Broader coverage can ensure that you are covered from a wider variety of claims.
What are the differences between the two?
The similarities and differences between first- and third-party insurance are:
| First-party insurance | Third-party insurance | |
| Who pays the premium for it? | The policyholder | The policyholder |
| Who is compensated by it? | The policyholder | The victim hurt by the policyholder’s negligence |
| What does the insurance cover? | The policyholder’s losses | Losses sustained by the victims of the policyholder’s negligence |
| Who files the insurance claim? | The policyholder | The victim hurt by the policyholder’s negligence |
| How does it help the policyholder? | It covers the policyholder’s own losses | It protects the policyholder by defending against legal claims and from costs associated with those claims, like the verdict or settlement |
How do I make a first-party insurance claim?
If you get hurt, you would file an insurance claim against your own insurance company. The company would have a claims intake process. If the insurance contract covers your losses, you would be entitled to compensation for them.
If your insurance company wrongly denies the claim, it can be insurance bad faith. You can sue the insurance company. Successful bad faith insurance claims can overturn the denial and recover compensation for the costs of filing the lawsuit, as well as other damages.
How do I make a third-party insurance claim?
If you get hurt by someone else’s negligence, you can file a claim against their insurer. The claim demands that the insurance company compensate you for losses that fall under the liability policy that they have with the person who hurt you.
Most third-party insurance claims happen in the context of a car accident. The claim is filed against the at-fault driver’s auto insurance company.
This type of claim is more adversarial. The insurance company only owes a legal duty to its own policyholder, not to you. They can, and they likely will, offer you way less compensation than they know that you deserve. For this reason, claimants will generally want to be represented by a personal injury attorney from a reputable law firm before initiating the third-party insurance claim process.
What happens if the policy limit is reached?
Both first- and third-party insurance coverage will generally have a policy limit. This is the maximum amount that the policy will pay out. Losses over the policy limit will fall on you.
An example of policy limits in first-party insurance is for comprehensive and collision coverage. This coverage is generally limited to the value of your motor vehicle. If your car gets damaged in an auto accident and it was worth $10,000, but you choose to have it repaired at $12,000, your insurance provider would only cover the first $10,000. You would pay for the last $2,000.
Policy limits are more important in third-party insurance situations. If you negligently hurt someone else, your liability coverage will only pay out up to the limit. You would be responsible for the remainder. For serious injuries, the policy limit can fall far short of what the victim is entitled to.
For example: Jack is driving while distracted and causes a fatal car crash. His liability coverage is the state’s minimum of $15,000 per person. The victim’s estate files a wrongful death claim that demands $1,000,000. Even if the claim settles for a fraction of that amount, Jack will still be responsible for paying a lot of it.
Do all states require third-party car insurance?
Every state except New Hampshire and Virginia require third-party liability car insurance, or liability coverage. In states that require it, minimum amounts are specified to cover:
- bodily injury coverage per person involved in the crash,
- the total bodily injury coverage per accident, for all of those involved, and
- property damage coverage.
In California, for example, the minimum amounts are:
- $15,000 of bodily injury coverage per person,
- $30,000 of bodily injury coverage per accident, and
- $5,000 of property damage coverage.[1]
Car owners are required to have insurance plans that meet these standards. Carrying more than the minimum amounts can protect you from legal claims that demand more than the minimums. The costs of the medical expenses alone from a car accident can easily eclipse these low minimum amounts.
Legal Citations:
[1] California Insurance Code 11580.1(b)(1) INS and California Vehicle Code 16056(a) VC.
