First party insurance
| First party insurance |
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First party insurance is a system under which insurance cover is ensured and compensation is granted immediately by the insurer to the injured party.
The basic principle of first party insurance is that, as a general rule, the insurance company pays compensation immediately after the occurrence of a loss, as long as it can be justified that the loss in question is an insured risk covered by an insurance policy. Unlike third party liability insurance, reimbursement by an insurance company takes place regardless of whether or not there is civil liability. The advantages of different first party liability insurance policies are properly used to solve a number of social problems. Under the first party liability insurance policy, the insurer covers the potential for personal injury to a given victim or a given location. For this reason, it is much simpler for the insured to flag specific conditions that may have an impact on the risk to the insurer.
Types of insurance
First party liability insurance can be categorised into two main classes: (1) insurance to compensate for personal injury; and (2) insurance, which takes the form of insurance against particular damage to property.
- Systems that concentrate on personal injury compensation usually do not differ in terms of coverage depending on the cause of the injury, i.e. if the reason is catastrophe or not. It therefore comes in the shape of general accident insurance. As a consequence, the coverage is based on the specific costs the affected party would face as a result of the incident, such as loss of income, (additional) medical costs, and in a number of situations even pain and suffering.
- The other form of first party insurance concerns (only) property damage, for instance housing insurance. Nonetheless, in several countries, first party insurance for damage to property does not cover damage due to natural catastrophes.
Copayment Features
In order to reduce the potential ineffectiveness of the risk pool, first party insurers frequently implement co-payment elements such as own contribution and co-insurance in the insurance system. These co-payment elements, by obliging insurers, ex ante, to incorporate part of the cost of accidents into their decision-making account, help to adjust incentives for insurers and the insured party and thus reduce the inefficiency of the risk pool. Deductions oblige insurers to cover up to a certain proportion of their accident costs before the insurer pays.l or part of the remaining part. On the contrary, co-insurance policies stipulate that the insurer pays only a fraction (for example, seventy-five per cent) of the policyholder's overall loss. It should be borne in mind, however, that first party insurance contracts usually contain 'non-costly limits' that limit the amount of co-payment that a policyholder may be obliged to pay during the year.
References
- Cane, P., Atiyah, P.S. (2013). Atiyah's Accidents, Compensation and the Law. Cambridge University Press, 289-292.
- Faure, M., Bruggeman, V. (2008-2009). Catastrophic Risks and First-Party Insurance. Connecticut Insurance Law Journal, 15(1), 11-14.
- Hanson, J.D., Logue, K.D. (1990). The First-Party Insurance Externality: An Economic Justification for Enterprise Liability. University of Michigan, 76(1), 142.
- Murphy, L.E., Downs A.B., Levin J.M. (2007). Property Insurance Litigator's Handbook. American Bar Association, 6.
- Seale, J.H. (2017). System and Method for Processing Insurance Claims. Cash-Pay LLC, 1.
Author: Patrycja Róg
