| An insured may submit a claim to his insurer to recover under two different categories of insurance. The categories are based on whom the insurer is required to pay. If the insurer is required to pay the insured for his loss, the insurance classification is "first-party" insurance. If the insurer is required to pay a third party on behalf of the insured due to a loss caused by the insured to the third party or the third party's property, the insurance classification is "third-party" insurance. This article addresses first-party insurance only.
Nature of first-party insurance
When an insured sustains a direct loss, for example, to his own property, he submits a first-party claim to his insurer. The insurance policy proceeds are paid directly to the insured to rectify his actual loss. The purpose of first-party coverage is to reimburse the insured for his actual loss, but no more than that.
Types of first-party insurance
Almost all types of insurance may be classified as first-party insurance. The exceptions include liability insurance and uninsured motorist insurance.
Property insurance is considered first-party insurance. If an insured's home or building is damaged or destroyed, he sustains a direct, actual loss. The insurer then pays the policy proceeds directly to the insured to indemnify such loss. To ensure that the insured is fully indemnified for the loss but does not receive more, property insurance policies provide alternative limitations on the amount to be paid. The insurer is only required to pay the smallest amount of the following: the policy limit, the property's value at the time of loss, the cost to repair or replace the property, or the amount of the insured's "insurable interest" in the property at the time of loss.
Health coverage may be considered first-party insurance, even though the insurer's payment is usually not made directly to the insured. The insurer usually pays the provider of the health care services. However, this is still considered first-party insurance because the proceeds are paid due to a direct loss of the insured, which is his injury and medical expenses. The payment is not made as a result of the insured causing a loss to a third party, as is the case for third-party insurance.
Life insurance is also first-party insurance, despite the fact that the insurer pays a beneficiary designated in the policy rather than the insured. The first-party classification is based on the fact that the insured is the one who suffers the direct loss, which is the loss of his life.
No-fault automobile insurance is classified as first-party insurance. In states that provide for no-fault insurance, an injured party receives payment from the insurer for his loss without regard to which party was at fault. The injured party does not seek payment from the tortfeasor in a tort action. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |