Understanding the Differences Between First-Party and Third-Party Claims in Auto Property Damage
When it comes to auto insurance claims for property damage, the differences between first-party and third-party claims are significant. Understanding these differences is key to knowing your rights and what to expect when filing a claim.
At their core, these two types of claims operate under entirely different frameworks: first-party claims are governed by your insurance contract, while third-party claims are dictated by negligence and tort law.
First-Party Claims: Contractual Obligations
A first-party claim is made against your own insurance company under the terms of your auto insurance policy. This type of claim arises when you experience a loss covered under your policy, such as collision damage, comprehensive losses (e.g., theft or natural disasters), or uninsured/underinsured motorist coverage.
Your rights and the insurer’s obligations are defined explicitly by the insurance contract.
Key Features of First-Party Claims
Contract Language is King
- The insurer is bound to honor the specific coverages you purchased, but their liability is limited to the terms and limits outlined in the policy.
- For example, if you have $1,000 in custom equipment coverage but your aftermarket wheels are worth $3,000, you would only receive up to the $1,000 limit unless additional coverage was purchased.
Examples of What’s Covered
- Damage to your vehicle caused by a collision (collision coverage).
- Theft, vandalism, or natural disasters (comprehensive coverage).
- Repairs or replacement for a cracked windshield (if glass coverage is included).
- Diminished value may be covered under Uninsured Motorist coverage, but only if the loss is directly tied to the negligence of an uninsured driver, and only if diminished value is not excluded in the UM/UIM policy language.
Examples of What’s Not Covered
- Wear and tear or mechanical failures.
- Damage exceeding policy limits (e.g., underinsured custom equipment).
- Non-covered scenarios like using the vehicle for ridesharing without a commercial policy.
Challenges in First-Party Claims
The insurer often relies on internal appraisals and cost-cutting measures, such as using aftermarket parts for repairs. Policyholders may need to invoke the Appraisal Clause in repair disputes or total loss disagreements (except with carriers like State Farm, which does not allow appraisal clause use for repair disputes).
Third-Party Claims: Negligence and Tort Law
A third-party claim is made against another driver’s insurance policy when that driver is at fault for the accident. Unlike first-party claims, third-party claims rely on the legal principles of negligence and tort law to determine liability and damages.
Key Features of Third-Party Claims
Negligence Determines Liability
- To recover damages, you must prove that the other driver’s negligence caused the accident. For example, if the other driver rear-ends you because they were texting, they would likely be found at fault.
Examples of What’s Covered
- Repairs to your vehicle caused by the at-fault driver’s actions.
- Rental car expenses incurred while your vehicle is being repaired.
- Diminished value is often recoverable in third-party claims, even in states where it is not covered under first-party contracts.
- Loss of use damages for the inconvenience of not having your vehicle.
Examples of What’s Not Covered
- Repairs exceeding the at-fault driver’s policy limits (in such cases, you might pursue a Stowers demand and/or rely on your own underinsured motorist coverage).
- Wear and tear, prior damage, or unrelated mechanical failures.
Challenges in Third-Party Claims
The at-fault driver’s insurance company has no contractual obligation to you and may prioritize minimizing their payout. They might argue that your diminished value is exaggerated, that your repair costs are unreasonable, or that some damages are unrelated to the accident. The only recourse for an unfair third-party claim settlement offer is to sue the at fault party or become an expert claim negotiator and convince the carrier to pay a more fair amount voluntarily (nearly impossible if you’re not a seasoned litigation and auto claims expert).
Practical Examples
Scenario 1: Collision With Aftermarket Equipment
- First-Party Claim: If your car is rear-ended and you file a claim under your own collision coverage, your policy will only pay for damages to your custom equipment up to the custom equipment limit you purchased.
- Third-Party Claim: The at-fault driver’s liability coverage should pay for all aftermarket equipment, provided you can prove its pre-accident value and relevance to the claim.
Scenario 2: Diminished Value on a Luxury Vehicle
- First-Party Claim: Your insurance contract normally does not cover diminished value unless it’s part of an uninsured motorist claim, but there are some states where it is possible, with the most notable exception being the State of Georgia.
- Third-Party Claim: You can recover diminished value as part of your claim against the at-fault driver, as tort law recognizes this as a legitimate economic loss in almost every state.
Scenario 3: Rental Car Costs After an Accident
- First-Party Claim: Covered only if you have rental reimbursement coverage, and only up to the daily amount listed in your policy.
- Third-Party Claim: The at-fault driver’s liability insurer must compensate you for loss of use during the time that you are deprived of the use of your vehicle, which in most states is based on the daily cost to rent a vehicle just like yours, regardless of whether you carry rental coverage on your own policy.
Key Takeaways
- First-party claims are defined by policy language and are limited to the terms and conditions of your auto insurance contract.
- Third-party claims are governed by negligence and tort law, requiring proof of fault to recover damages.
- Knowing what is and isn’t covered in each scenario helps you navigate the claims process effectively.
- You may have to file both a first party and a third party claim in order to get the full damages covered.
Both types of claims come with challenges, but understanding the distinctions ensures you can advocate for what you’re owed. When in doubt, consult an expert who can help you navigate the complexities of property damage claims—whether it’s a first-party policy dispute or holding a negligent driver accountable.