There are two broad categories of insurance: first-party and third-party. An easy way to understand the distinction is as follows. “First party” insurance covers losses to the insured person or property, like getting a cold or denting a car door. “Third party” insurance covers losses to other persons or property caused by the insured, like when a dog bites a guest who then sues the homeowner. Some insurance policies are purely first or third party. Others are blends that provide coverages for both. Knowing which category a particular policy falls under is essential, as the law that governs the different categories can diverge substantially even when it seems to be the same exact issue.
Examples of common pure first party insurance policies include life, health and disability insurance. For example, in a long-term disability policy, if a disability prevents the insured from performing the material duties of their occupation for more than a few months, the insurance pays a portion of the insured’s monthly income until age 65, or sometimes, for life. Policies like these are always first party because they never include a provision that covers the insured for, say, causing another to become disabled or sick.
Third party policies are different. Those policies pay for the costs to defend lawsuits against the insured, as well as legal judgments. Thus, this coverage protects the insured against claims brought by third-parties alleging that the insured caused them to suffer harm. Common examples of pure third-party policies include professional liability insurance, errors and omissions (“E&O”) coverage, malpractice insurance, and directors’ and officers’ (“D&O”) insurance. Perhaps the most common example is professional liability insurance, which provides third-party liability coverage when the insured’s professional negligence or failure to perform a professional service causes harm to a third-party such as a client.
Many insurance policies provide both first and third-party coverage. If a policy insures a piece of property, it is likely a hybrid policy. The most common example is homeowners insurance. These policies typically cover damage to the home or personal property (first-party), as well as injuries caused to others when at the insured property (third-party). Another common kind of hybrid policy is auto insurance. These cover damage to the vehicle (first-party), injury or property damage to another resulting from the insured’s negligent driving (third-party), or injuries to the insured caused by another uninsured or underinsured motorist (first-party). Auto policies are often bought as just third-party coverage when the vehicle is older and the insured is not worried about repairing minor damage.
Knowing what type of coverage is at issue in each specific situation is very important, and is often easily confused by non-experts. Insurance law can diverge significantly on issues that seemingly are the same between first and third party policies, like the duty to give notice of a claim or the analysis of cause of loss. Relying on what may seem to be clear and direct may prove to be a consequential mistake if one fails to realize the rule they are reading was developed in the context of a different type of coverage.
Ivo Labar and Dan Veroff are trial attorneys at Kerr & Wagstaffe LLP specializing in insurance policyholder rights. To learn more about the attorneys and their insurance practice, please explore the links at the top of this page.