Auto Coverage and First-Party vs Third-Party

Once or twice per year – when we renew our auto insurance policies – our automobile insurance company will send us a "dec sheet" (short for "declaration sheet") that summarizes the different types and amounts of automobile insurance coverage that we have to protect ourselves and our vehicles. Unfortunately, many of us just toss these declaration sheets into a drawer or into a glove compartment (hopefully not into a wastebasket) without giving them a second thought. There are at least two excellent reasons for taking a closer look at them, however – making sure we have the right types of coverage and making sure we have the right amounts of coverage. But to make that evaluation, we first need to know what each of coverage is, and how it may protect other people and us.

Collision coverage protects you when your vehicle is damaged in a collision with and object such as another automobile or a stationary object like a signpost. If you own your vehicle free-and-clear, collision coverage is optional, and whether or not to carry it – and how low or high a deductible to have with it – is purely an economic decision. If you are leasing your vehicle, however, or if you are still paying on a loan for the vehicle, your lease or loan agreement will typically require that you have this coverage.

Comprehensive coverage is similar to collision coverage – it protects you when and if your vehicle is damaged. In the case of comprehensive coverage, this kicks in when your loss is due to something other than a collision, such as theft, weather damage, damage from hitting an animal, or vandalism. It typically also covers glass damage, although some insurers have separate glass coverages. Like collision coverage, comprehensive is optional if you own your vehicle but typically required under a lease or loan agreement.

Liability coverage, which includes Property Damage and Bodily Injury coverages, protects you legally and financially if you cause a collision that damages someone's property or injures them physically. In California, the minimum property damage coverage is $5,000 per incident, and the minimum bodily injury coverage is $15,000 per person/$30,000 per incident. This is required by law. Whether or not to carry higher limits – and how much higher – is both an economical choice and a limiting factor on another essential coverage – uninsured motorist coverage.

Uninsured motorist (UM) coverage protects you and your passengers if you are injured while in your own vehicle and if the driver(s) responsible for the collision is not insured. It will also often protect you and members of your household if you are injured in an incident caused by an uninsured motorist even if you're not in your vehicle – such as being hit as a bicyclist or pedestrian.

Underinsured motorist (UIM) coverage is what your "uninsured" motorist coverage becomes when the driver who causes your injury is insured, but inadequately so. If, for example, you sustain a serious injury, but the responsible driver only carries the minimum required $15,000 bodily injury coverage, you will not be fully compensated by that. In this situation, it's important to have a higher UM/UIM coverage limit, because the difference in limits is what will typically become available to you.

Medpay or "medical payments" coverage is another one of our "best buy" recommendations because it directly protects you and your passengers if you are injured in a motor vehicle accident. Additionally, medpay is a type of "no-fault" coverage – it doesn't matter who caused the accident, the medpay is still available to you and your passenger. Medpay is also an optional coverage, so whether or not to add it to your policy is an economical choice.

Gap insurance is typically an option included when financing a new car purchase. They say that a vehicle can lose thousands of dollars in value when you drive off the dealer's lot. This can be a painful discovery if someone hits and totals your vehicle, and you discover their insurance is only responsible for compensating the "fair market value" of the car rather than the larger amount you may still owe on your auto loan. Gap insurance covers this difference, paying off any difference. It's an optional insurance, but it may be the right choice if you can't afford to cover this difference out of pocket.

Umbrella coverage is a separate insurance policy from your vehicle insurance, though you may purchase it from the same insurer or agent. It adds a second layer or "umbrella" of coverage over and above your auto insurance coverage limits. These are typically either for individuals who have large assets they wish to protect or for businesses wanting to add further coverage. Umbrella policies are typically for large amounts, such as $1 million or more. Most only provide additional liability coverage, but a few – we like these – also add additional uninsured/underinsured motorist coverage.

First-Party and Third-Party coverage are legal terms of art that you'll usually only hear attorneys and insurance adjustors discussing. In essence, coverages available to you under your own policy – collision, medical payments, uninsured motorist -- are "first-party" coverages, and claims that you make under your own policy for these items are "first-party" claims. Coverage available to you under the policy of the person who caused you injury or damage – bodily injury and property damage – are "third-party" coverages and claims against these are "third party claims.

There may be more than one third party insurance available to you as the result of a collision. For example, if the person who injured you was on the job at the time of the collision, both his personal policy and his employer's insurance may be available for third party claims on your behalf. Or if the responsible driver was driving another person's vehicle, then the separate policies for each may be available. Sorting out these possibilities is an important service provided by an experienced personal injury attorney.

There may also be more than one first-party insurance available to you when you suffer a loss or injury in an accident. If you were on the job at the time of injury, then both your personal auto policy and your employer's auto and/or workers' compensation coverage may be available to you. Or if you live in a household with a family member who has their own separate uninsured motorist coverage, that may be available to you in addition to your own. The rules for this can be complicated, so again this is something to discuss with your attorney. 

Editor’s Note: This page has been updated for accuracy and relevancy [cha 5.6.21]

Image by Tumisu from Pixabay

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