Who Is Being Referred to When Insurance Refers to First-Party?
The First-Party In An Insurance Coverage Is the Insured Policyholder. A Third-Party Is a Stranger Disconnected to the Insurance But Who May Be Harmed By the First-Party. When a Third-Party Alleges Harm Caused By the First-Party the Insurer Acts to Defend and Pays If Necessary On Behalf of the First-Party.
Understanding What Differs Within First-Party and Third-Party Insurance Coverage Including Claim Rights
A very common question involving 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 (with some exceptions). It is usually the sole decision of the insured whether to report the matter to the insurer; however, failure to promptly report a matter to an insurer may void rights of the insured to report a matter and seek assistance from the insurer. Said another way, if the insured causes harm to the third party, the third party 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.
Direct Report, exception
As above, when a third party suffers harm, being a person that is a stranger to the insurance contract, meaning being without any named status under the insurance contract whereas the insurance contract is between the first party (insured) and the second party (insurer), the third party is, generally, without any rights to take legal action against the insurer of another person. Accordingly, in most circumstances, the third party must wait for the first party to initiate a claim with an insurer; and of course, if the first party prefers to avoid a claim with an insurer, then the third party is, usually, unable to force the first party to do so. However, among a few other exceptions, in the realm of automobile liability insurance, per section 258 of the Insurance Act, R.S.O. 1990, c. I.8, when a third party suffers injury or damage sufficient to give rise to a tort claim, and the first party fails to make a claim with an insurer, the third party may name, and thereby include, the insurer within a legal action. Specifically, section 258 of the Insurance Act states:
258 (1) Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person’s judgment and of any other judgments or claims against the insured covered by the contract and may, on the person’s own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.
Interestingly, the right of the third party to draw in the insurer of the first party is available even where the first party violated conditions within the insurance policy; and accordingly, the insurer remains absolutely liable to the third party, for the minimum statutory liability limits, currently $200,000 within Ontario, regardless of the conduct of the first party. Of course, where the first party (insured) violated conditions within the insurance policy that would, in the absence of the statute imposing absolute liability, nullify any obligations of the insurer, the insurer may thereafter subrogate against the insured. The statutory imposition of absolute liability in the amount of $200,000 is found in section 258(4), section 258(9), and section 251 the Insurance Act wherein it is said:
(a) an assignment, waiver, surrender, cancellation or discharge of the contract, or of any interest therein or of the proceeds thereof, made by the insured after the happening of the event giving rise to a claim under the contract;
(b) any act or default of the insured before or after that event in contravention of this Part or of the terms of the contract; or
(c) any contravention of the Criminal Code (Canada) or a statute of any province or territory of Canada or of any state or the District of Columbia of the United States of America by the owner or driver of the automobile,
and nothing mentioned in clause (a), (b) or (c) is available to the insurer as a defence in an action brought under subsection (1).
258 (9) Despite anything contained therein to the contrary, every contract evidenced by a motor vehicle liability policy shall, for the purposes of this section, be deemed to provide all the types of coverage mentioned in section 250, but the insurer is not liable to a claimant with respect to such coverage in excess of the limits mentioned in section 251.
251 (1) Every contract evidenced by a motor vehicle liability policy insures, in respect of any one accident, to the limit of at least $200,000, exclusive of interest and costs, against liability resulting from bodily injury to or the death of one or more persons and loss of or damage to property.
(2) The contract shall be interpreted to mean that where, by reason of any one accident, liability results from bodily injury or death and from loss of or damage to property,
(a) claims against the insured arising out of bodily injury or death have priority to the extent of $190,000 over claims arising out of loss of or damage to property; and
(b) claims against the insured arising out of loss of or damage to property have priority to the extent of $10,000 over claims arising out of bodily injury or death.
The first party to an insurance contract is the insured, meaning the person who is the policyholder and thereby holds the rights to the coverage and protection provided by the insurance coverage. The second party to an insurance contract is the insurer, being the insurance company who is providing the insurance coverage and protection to the insured as the first party.
A third party is a person unrelated or disconnected to the insurance policy who may bring a legal liability claim against the first party. In turn, the first party, when sued by a third party, would then report the claim to the second party as the insurer providing protection to the first party. Except for rare circumstances, an injured third party is without right to directly bring a claim against the insurer of the first party.