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The distinction between a first-party and third-party claim has a considerable impact on how claims are handled and resolved. Most significantly, it defines the obligations of insurers. While an insurer owes a duty of good faith and fair dealing to its policyholders, it owes no such duty to third-party claimants.
This can be an important factor for plaintiffs who file first-party UM / UIM claims with their own insurance company. Because an insurance company owes a duty of good faith to its insured, it has an obligation to promptly and fairly investigate, process, and pay out covered losses.
In the event a first-party injury claimant suffers losses because their insurance company failed to uphold its good faith duty, they have the right to recover against their own insurer for bad faith.
Insurer’s Duty of Good Faith & Fair Dealing
In California, insurance carriers owe their policyholders a duty of good faith and fair dealing.
This means that when a person files a first-party claim or has a claim failed against them by a third party, their insurance company must act in good faith to:
- Promptly investigate the accident
- Determine fault and liability
- Engage in fair attempts to settle claims
- Pay out covered losses to the claimant up to the limits of their policy
- Defend claims brought against the policyholder
Because an insurer’s duty of good faith “runs in favor of the other contracting party… and… a ‘third party claimant’ may not bring an action for breach of the covenant or its duties.” (Hand v. Farmers Insurance Exchange (1994) 23 Cal.App.4th 1847, 1855.), the duty of good faith applies only to an insurance company’s policyholder.
- In first-party claims, the insurer’s good faith duty to its insured includes its duty to fairly and promptly investigate and process a claim, inform the insured of their rights, and make reasonable attempts to settle.
- In third-party claims, the insurer’s good faith duty applies only to its policyholder, who it is obligated to defend against claims brought by third parties. Insurers do not owe a duty of good faith to third-party claimants, including victims injured by their policyholders.
Bad Faith Actions Arising From UM / UIM Claims
UM / UIM claims are among the very few first-party claims that arise from personal injury. In these matters, a policyholder who has been injured by another party may look to recover from their own insurance company if they have purchased this additional form of coverage.
You may file a UM / UIM claim if you:
- Were involved in an accident caused by an uninsured motorist or a hit and run accident, in which case the driver is presumed to be uninsured.
- Were injured by a motorist with a low-limit liability policy (underinsured).
- Suffered serious injuries and damages that exceed the policy limits of the defendant driver (underinsured).
When a UM / UIM claim is filed, your insurance carrier is obligated to handle your claim in good faith. If it fails to uphold this duty and you suffer losses as a result, you have the right to recover for bad faith. In personal injury matters, first-party bad faith actions are commonly brought over unfair settlement activities and conduct that adversely affects the insured.
Juries in bad faith cases are instructed to consider a number of factors when determining whether insurers acted in bad faith (CACI No 2337), including how insurance companies treated policyholders, the promptness with which they investigated and processed claims, and the reasonableness of the efforts.
There are many injury-related unfair claims practices and conduct that may be considered bad faith. Pet of California Insurance Code § 790.03, these may include:
- Deceptive or deliberate practices or to avoid paying claims
- Misrepresentation of relevant facts or policy provisions
- Failure to properly investigate and process claims
- Failure to adopt and implement a reasonable investigation process
- Unreasonable delays in investigation or payment of claim
- Failure to accept or deny coverage in a reasonable time
- Arbitrary or unreasonable demands for proof of loss
- Misleading insured about the applicable statute of limitations
- Directly advising insured not to hire an attorney
- Compelling insured to file lawsuits by offering substantially less than amounts ultimately recovered in actions brought by insured
- Refusals to accept reasonable settlement within liability policy limits
- Failures to inform insured of their rights or disclose policy limits and provisions
Biren Law Group: Proven Personal Injury Lawyers
Biren Law Group is a family-law run, boutique law firm that focuses exclusively on representing injured victims and families in matters of personal injury and wrongful death.
Backed by decades of collective experience, our award-winning attorneys have excelled in litigating complex claims involving third-party liability, multiple defendants, workplace injuries, industrial accidents, and first-party claims and insurance bad faith.
Our firm has the breadth of knowledge to assist victims and fellow lawyers in a range of third party injury cases across Los Angeles and Southern California, including cases where they need to assess options for pursuing personal injury and / or workers' compensation claims. Call or contact us online to speak with an attorney about your case and options.