First Party Vs Third Party Bad Faith Claims Explained

An insurance policy is a promise. For an injured person or a family navigating medical bills, lost wages, and a painful recovery, that promise feels like a lifeline. When an insurance company breaks that promise by acting in bad faith, the harm cuts deeper than any single unpaid bill—it erodes the very safety net that was supposed to be there. Understanding the difference between first-party and third-party bad faith claims is the first step toward holding an insurer accountable and getting the full measure of justice the law allows.

The law imposes a duty of good faith and fair dealing on every insurance contract. This duty cannot be written out of a policy. When an insurer puts its own financial interests ahead of its obligations, that conduct can give rise to a separate civil wrong—a bad faith claim—that carries its own damages. The path forward depends on whether the insurance in question is your own policy or the policy of the person who caused the injury.

When Your Own Insurer Breaches the Contract of Trust

A first-party bad faith claim arises directly between an insured individual and their own insurance carrier. The relationship is created by the policy itself. If a patient has health insurance, disability coverage, uninsured motorist protection, or homeowner’s coverage that includes medical payments to others, the insurer is obligated to process and pay valid claims promptly and fairly. When it does not, the injured person can seek relief not only for the denied benefit but also for the harm caused by the insurer’s misconduct.

The standard of care for a first-party insurer is shaped by what a reasonable insurance company would do under the same circumstances. It includes duties such as conducting a thorough and objective investigation, evaluating the claim without an eye solely toward minimizing payouts, and providing a clear explanation if coverage is denied. An unjustified refusal to pay, an unreasonable delay, or a demand for documents that are clearly unnecessary can all be evidence that the insurer has placed its own bottom line above its duty to the policyholder.

Damages in a first-party bad faith case reach beyond the original claim amount. The law permits recovery of the policy benefits that should have been paid, along with consequential financial losses—such as the cost of borrowing money to cover medical treatments or the late fees that piled up because a disability check never arrived. Emotional distress damages are often available because the breach of trust by an insurer can cause profound anxiety, sleeplessness, and genuine suffering. In cases where an insurer’s conduct was particularly egregious, punitive damages may be awarded to punish the carrier and deter similar behavior.

Statutes of limitation for bad faith claims vary by state and sometimes depend on whether the court treats the claim as sounding in contract or tort. A family discovering this mistreatment should consult a legal professional promptly; waiting too long can extinguish the right to bring a case, even when the insurer’s actions were clearly wrong. The same urgency applies to evidence. Adjusters’ notes, recorded phone calls, denial letters, and a written log of every interaction become the factual spine of a first-party bad faith lawsuit. The moment an insured person suspects something is off, they should start preserving that trail.

When a Liability Insurer Puts Its Interests Ahead of the Injured Person

A third-party bad faith claim looks different because the injured person is not the insurance company’s customer. Instead, the claim involves a liability policy held by the person or business that caused the harm—a driver’s auto policy after a crash, a property owner’s general liability policy after a fall, or a medical provider’s malpractice coverage. The duty in this context is not owed directly to the injured party at the outset, but a powerful obligation arises when a settlement demand is made within policy limits.

The legal concept that defines this duty is the insurer’s obligation to act in good faith when deciding whether to settle a claim against its policyholder. The insurance company must give at least as much consideration to the financial interests of the injured person as it gives to its own. If a liability carrier unreasonably refuses to settle a valid claim for an amount within the policy limits—exposing its own insured to a devastating excess judgment—that refusal can become the foundation for a third-party bad faith claim. The injured person, who now has a judgment larger than the available coverage, can step into the shoes of the at-fault party and pursue the insurance company directly for the entire amount of the judgment.

This area of law serves as a critical shield for families facing catastrophic harm. When a hospital’s malpractice insurer ignores clear liability and refuses to offer the policy limits, or when a trucking company’s carrier drags its feet until the statute of limitations becomes a problem, the consequences can be ruinous. The standard of care requires the insurer to investigate diligently, to evaluate the severity of the injuries honestly, and to communicate settlement opportunities to its insured in a meaningful way. If an adjuster simply “sits” on a demand letter without responding, or makes a token offer that no reasonable person would accept given the facts, the insurer may be acting in bad faith.

Damages in a third-party bad faith action can be transformative. The injured person may recover the full amount of the excess judgment, including amounts for future medical care and lifelong support needs, even if those sums far surpass the policy limits. In many jurisdictions, emotional distress damages and attorneys’ fees are also available. The same evidentiary discipline applies: letters from the liability carrier, recorded statements taken shortly after the accident, and any internal claims notes that later surface can all reveal whether the insurer placed its own financial interests above the safety of an injured family.

The following action items can help protect a potential bad faith claim from the very first days of a dispute.

• Keep a detailed file of every letter, email, and insurance document, and note the date and substance of every phone call, including the adjuster’s name and what was promised.
• Never accept a denial at face value. Ask for a written explanation that cites the specific policy language the insurer is relying on, and preserve that explanation.
• Seek medical and vocational evaluations that objectively document the full extent of the injury. An insurer’s bad faith often relies on undervaluing the harm, and solid clinical evidence limits that tactic.
• Consult an attorney who regularly handles insurance bad faith litigation. The procedural rules, pre-suit notice requirements, and evidentiary standards vary dramatically among states, and a misstep can close the door on a valuable claim.

Frequently Asked Questions

Q: Can an injured person bring a bad faith claim if the insurance company simply made a mistake?
A simple mistake, such as a clerical error that is quickly corrected, usually does not rise to the level of bad faith. Bad faith requires a showing that the insurer acted unreasonably or without proper cause, not just that it was wrong. A pattern of delay, a refusal to investigate, or a denial that ignores clear medical evidence is very different from an honest error.

Q: Is there a deadline for taking legal action against an insurance company for bad faith?
Yes. Every state has a statute of limitations for bad faith claims, and the time limit can be as short as one year or as long as six years, depending on the state and whether the claim is classified as a tort or a contract action. Because the classification can be technical, it is essential to speak with a lawyer promptly after suspecting bad faith, rather than waiting for a final resolution of the underlying claim.

Q: What kind of evidence is most powerful in a bad faith case?
Internal insurance company documents—such as claims notes, reserve reports, and evaluations prepared by the adjuster—often provide the most direct proof. Outside that, a detailed chronology of the insurer’s actions, medical records that were apparently ignored, and expert testimony about industry standards all help establish that the carrier did not act as a reasonable insurer would under the circumstances.

Q: If an injured person already accepted a settlement check, can they still pursue a bad faith lawsuit?
In many situations, accepting a settlement will end the ability to bring a bad faith claim, especially if the release included broad language. However, some partial payments or settlements that leave a portion of the claim unresolved may not automatically waive bad faith rights. Anyone who has signed a release or cashed a check should have the document reviewed by an attorney before concluding that all legal options are gone.

If you or a family member is dealing with an injury you suspect was caused by negligence, request a free, confidential case review through this site. A quick review can tell you where you stand and what your options are.