The answer to this question is not as simple as it might seem. In fact, it can be downright confusing. I’ll try to explain. First, the easier part. An insurance company owes its own policyholder a duty of good faith and fair dealing and all claims asserted by the policyholder. This kind of claim it is called a “first party claim.” A first party claim derives its name from the fact that an insured is the “first party” to the insurance contract/policy and the insurance company is the “second party” to the contract. First party claims can include uninsured motorist claims, auto property damage claims, med pay claims, homeowners claims, health insurance claims, life insurance claims, claims for defense and indemnity and so on. As long as the policyholder is making a claim with his or her own insurance company for coverage under a policy for which the policyholder paid premium, the claim is a “first party” claim and a duty of good faith and fair dealing applies.
Now for the part that seems counter-intuitive to many people.
If a person is making a liability claim against another party (be it an individual or a company – like a trucking company, a retail store, a product manufacturer, etc.) alleging that other party caused him harm by its conduct, such a claim is a “third-party claim.” In that circumstance, the injured person is not a party to the insurance contract at issue and is therefore referred to as a “third party.” Under Oklahoma law, there is no duty of good faith and fair dealing owed by an insurance company on a third-party claim. In other words, someone else’s insurance company does not owe a duty of good faith and fair dealing to a person who is not insured under a policy issued by that insurance company. Note there are a few exceptions to this rule, not least of which is a situation under an uninsured motorist insurance policy where passengers in a vehicle being operated by someone with uninsured motorist coverage are also covered under that person’s policy despite not having paid premium.
Perhaps the best example of a situation to illustrate this concept is a simple automobile accident.
If John and Mary have an accident at an intersection and there is a dispute between them about who ran the stop sign and because the cars to crash into each other, and number of different insurance claims might arise. For instance, both John and Mary presumably have their own automobile insurance policies that would pay for the damage to their vehicles. Each of those claims by John and Mary with their own insurance companies would be first party claims. If John and Mary each have med pay coverage, each of those claims by John and Mary against their own insurance companies would be first party claims. Let’s say Mary has suffered injuries in the accident that caused her to incur $50,000 worth of medical bills (this is not an uncommon occurrence). Let’s say that John carries the statutory minimum amount of liability insurance coverage on his policy of $25,000. Also, let’s say Mary has uninsured motorist (UM) coverage on her policy of $100,000.
Mary asserts a liability claim against John. She also asserts a UM claim against her own insurance company. John’s insurance company can treat Mary however they want without any recourse for Mary against that insurance company for bad faith. The reason is Mary’s claim against John is a third-party claim. John’s insurance company can conduct as poor an investigation as they want, can delay resolution of the claim as long as they want, can lowball Mary on the offers they make to settle her claim all they want and Mary has no recourse for bad faith directly against them. Her only recourse would be to sue John. If John’s insurance company acts unreasonably toward Mary and forces her to sue him, John may have a problem with that. If so, he might have recourse against his own insurance company for bad faith as a result. He’s a first party with his own company. Starting to make sense? The type of case John might have in our example will be discussed in a later post.
For current purposes, under our example, Mary’s UM claim against her own insurance company is a first party claim. Mary’s insurance company owes Mary a duty of good faith and fair dealing and therefore has to conduct a full, fair and timely investigation, must make a fair and reasonable evaluation of the claim, cannot treat Mary as an adversary, cannot put its own financial interests ahead of Mary’s and so on. If Mary’s insurance company does so in violation of the duty of good faith, Mary has recourse against her insurance company in the form of a bad faith case wherein she can recover above and beyond the amount of insurance coverage she paid premium for.
It is imperative for policyholders to know their rights and be familiar with the responsibilities insurance companies owe them when they are injured in an accident or have suffered some other insured loss.
The best way to handle questions on this front is to consult with an attorney who is familiar with the concepts dealt with here. Untangling what claims arise out of even a relatively simple auto accident can be a daunting task, especially when a policyholder is in a difficult situation after a loss of some kind.