You’ve probably heard the phrases first party and third party in relation to insurance, right? Do you know what they mean? Perhaps. But, for the sake of those who may not, let’s chat about it.
An insurance policy is a contract. A contract is comprised of several elements: a meeting of the minds, an offer, an acceptance and an exchange of something of value. In the case of the insurance policy, the company offers x-y-z coverage for x dollar premium amount. The insured accepts the offer and pays the specified premium in exchange for the promise by the insurance company to pay for whatever damage may occur in accordance with the terms of the contract.
In an insurance contract, the insurance company is the one that draws up the agreement and, thus, is considered the second party to the contract. The insured accepts the drawn up agreement and is considered the first party to the contract. All coverage directly relating to the insured are first party coverages. In simple terms, first party is about you and your stuff. A third party is an entity not a direct party to the subject contract but who may have rights to benefits of the subject contract. In other words, if the contract promises to protect you (first party) against damages you cause to another person or entity (third party), that other person or entity may be eligible to receive monetary benefits from your policy.
When you obtain an insurance policy, you are securing coverage for yourself and your things (first party) and coverage for the other guy (third party). Since first party coverage is about you and your things, examples of first party coverage in an auto policy are Collision, Comprehensive (for non-collision losses like vandalism, theft, fire) and Medical Payments. In regard to Medical Payments, there are a number of States that have No Fault Insurance Laws in force and their Medical Payments coverage falls under what is called Personal Injury Protection (PIP). These No Fault States each have their own versions of Personal Injury Protection coverage which typically provides a broader scope of benefits well beyond simple medical bill payments, and may also include wage loss, substitute services and even death benefits. PIP is also a mandatory coverage in No Fault States.
Third party coverage is known as liability coverage. Remember, third parties are those people not a party to the insurance contract but who may be beneficiaries of the contract. So, liability coverage is for events where “the other guy” suffers a loss for which you are legally liable. A typical example is the auto accident where you rear-end someone. The liability coverage under your insurance policy are there to pay for damages and injuries you caused up to the limits of the policy per the terms and conditions of the policy. These coverages for the other guy are mandatory in all States and each State has requirements for minimum limits that you must carry on your policy. You can purchase higher limits but you must have at least the minimum.
Finley Keller has spent nearly 30 years in the insurance industry, beginning as a licensed agent with a CLU then moving into claims. Auto, homeowner, worker’s comp and other liability-only type policy claims. Casualty and material damage. Her last ten years were spent in SIU (Special Investigative Unit), working with fraud detection. The last four years she was manager of SIU, responsible for working fraud cases and the training of employees in compliance with State regulations as related to fraud. She is a retired member of NCFIA, Northern California Fraud Investigators Association. She has a Senior Claims Law Associate (SCLA) designation through the American Educational Institute, Inc.
She writes about insurance in an effort to educate and assist people in understanding the basics and key principles of insurance. Please visit The Insurance Detangler