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First-Party vs. Third-Party Bad Faith: What’s the Difference?

During an insurance claim, an insurance company has a legal and ethical obligation to treat you fairly as a claimant. If the insurance company carelessly or intentionally mishandles your claim, it is guilty of insurance bad faith. If you are the victim of bad faith, you may be entitled to financial compensation in a lawsuit against the insurance provider for the losses you suffered. Learning the difference between first-party and third-party bad faith can help you understand your legal rights.

Duty of Good Faith in Arizona

Arizona’s insurance laws give insurance providers a responsibility to handle claims in a certain way. When a client purchases a policy, it creates an implied covenant of good faith. This means the insurance company must treat the client fairly and lawfully within the benefits and rights created by the insurance contract. An insurance company’s duty of good faith includes:

  • Communicating sufficiently with the client
  • Immediately conducting an adequate investigation
  • Acting reasonably while evaluating the claim
  • Promptly accepting and paying out a legitimate claim
  • Offering a fair and adequate amount according to the circumstances

The covenant of good faith also gives the insurance company a responsibility to refrain from any conduct that would impair these rights. If an insurance company breaches its contract by handling the claim unfairly, this is known as insurance bad faith.

Determining whether or not an insurer acted in good faith requires looking at the totality of the circumstances. This includes whether the insurance company made a reasonable effort to resolve the dispute in a timely manner, how diligently the insurer investigated the facts of the claim and whether the insurer made an effort to resolve the dispute in a way that would limit the potential for prejudice against a client.

What is First-Party Bad Faith?

Whether you are the victim of first-party or third-party bad faith depends on your relationship to the insurance provider. A first-party insurance claim refers to a claim filed with your own provider in pursuit of financial benefits for your injuries or losses. Thus, first-party bad faith refers to bad faith or unfair dealings by your own insurance company.

If you caused an auto accident in Arizona, for example, you would file a first-party claim with your own car insurance provider for financial reimbursement. If your own insurance carrier violates Arizona’s insurance law or fails to treat you fairly and reasonably, may have grounds to file a first-party bad-faith lawsuit against your provider for compensation.

What is Third-Party Bad Faith?

A third-party bad-faith claim, on the other hand, is filed in regard to the conduct of someone else’s insurance company. If you file a third-party personal injury claim, it means you are not the policyholder. Instead, you are alleging that the policyholder is legally responsible (liable) for your accident and that his or her insurance company is financially accountable. If the at-fault party’s insurance company fails to settle your claim in a fair or reasonable manner, you may have a case of third-party bad faith.

Some third-party bad-faith lawsuits are between the insured party and his or her insurance company for providing an injured person with compensation that exceeds the policy limits. If an insurance company fails to reasonably evaluate a claim, leading to a judgment that is outside of the policy limits, this could put the insured person’s personal assets at risk. In this scenario, the insured party may have grounds to file a third-party bad-faith claim against his or her own insurance provider.

Get Help From a Phoenix Insurance Attorney

Both first-party and third-party bad-faith claims are complicated. Consult with an insurance bad faith attorney attorney in Arizona for assistance with your particular claim. An attorney can help you go up against any insurance provider in pursuit of financial compensation for unfair or bad-faith dealings.