An Insurer’s Duty of Good Faith And Fair Dealing In California: First Party Versus Third Party Claims

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California’s laws and remedies for an insurance company’s breach of the implied covenant of good faith and fair dealing are uniquely favorable to policyholders.  Breach of the good faith duty, which occurs when an insurance company withholds policy benefits unreasonably or without proper cause, allows for tort damages and a punitive damage claim under California law.

That duty, however, only extends to first party claims, not third party claims.  Where an insurance company has a direct relationship to the insured making the claim, it is known as a first party claim.  Where an insurance company is defending and paying to settle a claim or lawsuit brought by a third person (known as a third party) who was injured or suffered a loss caused by the insured, it is known as a third party claim.  Third party claims are essentially liability claims against the insured.  Under California law, the insurer’s covenant 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 distinction, therefore, between first and third party claims is critical.  In addition to determining whether the duty of good faith and fair dealing apply, there are also different standards for “causation analysis” with respect to coverage and exclusions.  (Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal.3d 395, 406.)

In essence, only your own insurance company owes you a duty of good faith and fair dealing.  The insurance company for someone else, even if you were injured by that person and are making a claim against his or her insurance company, does not owe you that duty.

An example where people can experience the difference between first-party and third-party claims is in the context of an underinsured motorist claim.  When a person is injured in a car accident, and is making a claim against the negligent driver’s insurance company, that injured person is a third-party claimant because they are making a claim under someone else’s (the negligent driver’s) insurance policy.  After the injured person obtains policy benefits from the negligent driver’s insurance company, he or she can pursue an underinsured motorist claim against his or her own insurer.  The insurance company for the negligent driver, while it owes a duty of good faith to the negligent driver because that is its insured, owes no duty of good faith to the injured person because they do not have an insured-insurer relationship.  The injured person is only owed a duty of good faith from the insurer on the underinsured motorist claim, because that is the only insurance company that directly insured him or her.

When making a claim for insurance benefits, it is important to understand whether you are a first-party or third-party claimant.  This will dictate important aspects of your claim, including whether you are owed a duty of good faith and fair dealing.