First-party bad faith and third-party bad faith are distinct legal concepts in insurance law, each arising from different relationships and duties between the insurer, the insured, and third parties. 

• First-party bad faith concerns an insurer’s direct dealings with its policyholders, 
• while third-party bad faith concerns an insurer’s obligations when handling liability claims brought by third parties against its insured. 

What is first-party bad faith?

First-party bad faith occurs when an insurance company acts unreasonably in handling an insurance claim brought by its own insured. First-party bad faith can occur under any insurance policy type. These include life insurance, healthcare plans, long-term disability insurance, homeowners’ insurance, commercial property insurance, and uninsured / underinsured motorist insurance. To succeed on a claim for common law first-party bad faith, the insured (you) must establish that the insurer’s conduct was unreasonable and that the insurer either knowingly or recklessly disregarded the validity of your claim.

What is third-party bad faith?

Third-party bad faith arises when an insurance company fails to reasonably defend or settle a liability claim brought by a third party (you) against its insured (the at-fault party) or when an insurance company fails to reasonably indemnify its insured against liability claims. In this context, the insurer owes a duty of good faith and fair dealing to its insured (the at-fault party), not to the party bringing the claim (you).

A common scenario is where the liability insurer unreasonably refuses to settle a third-party claim within the available liability policy limits, thereby exposing its insured to excess liability. In the event the insurer’s failure to settle actually does expose the insured, i.e., when the injured party receives a jury verdict against the at-fault party in excess of the liability policy limit, the insured (the at-fault party) will have a claim for bad faith against the liability insurer. In some instances, the at-fault party may be motivated to assign that claim for bad faith to the injured party (you). This type of assignment is explicitly authorized by Colorado law, and provides the injured party (you) with another source of financial recovery. The damages available in this type of third-party bad faith case include economic damages equal to the amount of the excess verdict (that amount awarded by the jury that exceeds the liability policy limit). 

Key differences between first-party and third-party bad faith claims

The primary distinction lies in the nature of the duty and the parties involved. In first-party bad faith, the insurer’s duty is to its insured (you), and the focus is on the insurer’s handling of the claim submitted by its insured (you). All first-party insurers owe their policyholders a duty of good faith and fair dealing. This means the insurer must be fair and honest, must conduct a thorough investigation based on all available information, must complete a thorough and reasonably accurate evaluation of the claim, and must pay covered claims in a timely manner.

In contrast, third-party bad faith involves the insurer’s duty to protect its insured (the at-fault party) from excess liability to third parties (you), with the focus on the insurer’s conduct in handling the third-party (liability) claim. All third-party insurers owe their policyholders a duty of good faith and fair dealing. This means the insurer must defend the insured against covered liability claims, must make reasonable attempts to settle covered liability claims within policy limits, and must indemnify its insureds, up to the policy limits, for amounts owed on covered claims.

How Hailey | Hart handles third-party bad faith claims

We represent plaintiffs in personal injury matters. If time limitations allow, we present your claim to the at-fault party’s liability insurer and attempt a pre-litigation settlement. If the value of your claim exceeds the available liability policy limit, we demand prompt payment of the liability policy limit. If the at-fault party’s liability insurer fails to fairly settle your claim, we proceed onto litigation against the at-fault party. If we try your case to verdict and receive an award that exceeds the liability policy limit, we will attempt to negotiate an assignment of any bad faith claim from the at-fault party. 

Because most at-fault parties (now judgment creditors) cannot afford to pay large judgments out of pocket, they are motivated to assign their claims. If the assignment is secured, we will pursue a claim for third-party bad faith against the liability insurer on your behalf. Through that second lawsuit, we will pursue the total amount the jury awarded for you in the personal injury action.