Understanding 'First Party' and 'Third Party' Insurance Coverage and Right to Bring Claims
A common question regarding insurance law is, "What is all this 'first party and third party' stuff?" This can seem a bit confusing, especially the obvious question of, "If there is a first party and third party, is there a second party?" To begin with, the references to various parties relates to the position each person holds within insurance relations:
- The first party is the 'insured' being the person directly contracting with an insurance company for the purpose of obtaining insurance coverage;
- The second party is the 'insurer' being the person or entity that is contracted by the first party to provide insurance coverage; and
- The third party is a stranger to the contractual relationship between the first party (insured) and the second party (insurer).
The type of incident that causes a claim to arise will affect whether the matter is a first party claim or a third party claim. With a property loss claim, such as fire or storm damage, gives rise to a 'first party claim' where the insured person puts notice of the loss to the insurer. In such a first party claim, the insured seeks compensation for the loss from the insurer. With a liability loss claim, such as a 'slip & fall' injury, gives rise to 'third party claim' where the injury and losses is allegedly caused by the insured but caused to a person outside the contractual insurance relationship. Essentially, in the third party claim, the loss suffered by someone other than the insured and any loss to the insured is indirect - the insured is without actual injury or losses but is facing losses from actual or potential litigation by a third party person.
A very common misunderstanding regarding a 'third party claim' is the false perception that the third party is with some sort of rights to coverage from the insurer. Generally, this is incorrect. It is a decision of the insured whether to report the matter to the insurer. If the insured causes harm to the third party, the third is, generally with very rare exception, without any right of direct protection or benefit under the insurance policy provided by the insurer. The insurance policy is for the protection of, and benefit to, the insured. However, when the third party brings litigation, or threatens to do so, against the insured, it is then that the insured reports the matter to the insurer and the insurer takes over by expending the effort and the costs to investigate and defend on behalf of the insured. The insurer protects the interests of the insured and the insured is required to assist, and co-operate with, the insurer.
Due to the common misunderstanding above, homeowners and contractors often misperceive that the insurance coverage carried by a contractor will voluntary make repairs for homeowners where the contractor has caused damages during renovation project work. This is a false perception; albeit, the homeowner is required to make an allegation and bring litigation, or threaten to do so, against the contractor. The homeowner is without direct relationship with the contractor's insurer. Of course, the contractor's insurer may 'roll-over' quickly and easily depending on the circumstances such as where the liability of the contractor is plain and obvious.