What is the difference between first-party and third-party auto insurance?

There is a difference between first-party and third-party auto insurance. Both first and third-party car insurance options can be vital to providing the best auto insurance protection for you when you drive. Typically, third-party auto insurance is required. Third-party insurance covers harm the at-fault driver causes to others – i.e., liability insurance. First-party insurance is coverage you purchase to protect yourself and your property. First-party coverage includes collision, comprehensive, and personal injury protection (PIP).

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Chris Tepedino is a feature writer that has written extensively about home, life, and car insurance for numerous websites. He has a college degree in communication from the University of Tennessee and has experience reporting, researching investigative pieces, and crafting detailed, data-driven features. His works have been featured on CB Blog Nation, Flow Words, Healing Law, WIBW Kansas, and C...

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Laura Walker graduated college with a BS in Criminal Justice with a minor in Political Science. She married her husband and began working in the family insurance business in 2005. She became a licensed agent and wrote P&C business focusing on personal lines insurance for 10 years. Laura serviced existing business and wrote new business. She now uses her insurance background to help educate...

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Reviewed by Laura Walker
Former Licensed Agent

UPDATED: Nov 24, 2021

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The Rundown

  • First-party auto insurance covers you and your property even if you cause the accident
  • Third-party insurance covers damage or injuries you cause when you are at fault
  • Most drivers are required to carry third-party insurance in the form of liability insurance

Owning a car is a fantastic privilege. You can take spur-of-the-moment road trips, visit friends and family who live far away and save money by not relying on public transportation. However, like all great privileges, owning a car also comes with its fair share of responsibilities. One of these responsibilities is ensuring you have the proper car insurance.

But not all car insurance policies are the same. It can be challenging to understand what each type of insurance coverage offers between first-party, third-party, liability, and collision. Fortunately, we’re here to help.

In this blog post, we’ll discuss the differences between first-party and third-party auto insurance and break down everything else you need to know about insuring your vehicle including finding cheap auto insurance quotes.

One of the essential things to know about insuring your vehicle is that you can usually save by comparing rates from different companies. You can get started by entering your ZIP code into our search tool to find the best auto insurance rates near you right now.

Car Insurance 101

Car insurance is a contract between you and your insurance company. This contract states that the insurance provider will cover you financially in the event of an auto accident. Or if your car is damaged as a result of a natural disaster.

To obtain coverage, you must choose a coverage limit and deductible. Coverage limit refers to the maximum amount of money your insurance provider will pay to cover a claim. In contrast, deductible refers to the amount of money you must pay into your insurance plan before your insurance covers any costs.

You must also pay a premium each month or year to maintain your insurance coverage. Premiums depend on several factors as described by AARP, including:

  • Location
  • Driving record
  • Age
  • Vehicle
  • Deductible amount

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Parties Involved in Insurance Coverage

When choosing your car insurance policy, understanding the various parties involved can help you find the coverage that can most benefit you. These parties include:

  • First-Party – In car insurance terms, first-party refers to the person who buys the insurance policy. If you’re insuring your car, you are the first party. The first party pays the premium and makes a claim when an accident occurs.
  • Second-Party – The second party refers to the insurance company. To receive coverage, the first party must buy a premium from the second party. Under the contract’s stipulations, the second party covers the first party’s damage costs.
  • Third-Party – The third-party refers to anyone injured or otherwise impacted by an auto accident caused by the first party. Third parties can be other motorists or pedestrians. The second party is liable to pay damages to the third party if a third party insurance contract is in place.

Understanding the Difference Between First and Third-Party Car Insurance

While both first and third-party car insurance coverage can keep you from being liable for paying for damages caused by a car accident, there are significant differences between these two insurance options. So let’s take a closer look.

First-Party Car Insurance

First-party car insurance makes the second party liable for damages caused by or resulting from unforeseen natural disasters, man-made disasters, auto collisions, or theft.

For example, suppose falling branches severely damage your vehicle during a storm. With first-party car insurance, your insurance company would be liable for covering the cost of these damages under your comprehensive policy plan.

For a more thorough understanding of first-party car insurance, let’s break it down into the following four categories:

  • Definition – First-party insurance covers the owner of the insured vehicle in the event of an accident.
  • Buyer – The owner of the insured vehicle purchases first-party insurance coverage.
  • Filer – The person who is hurt or suffers property damage must file first-party insurance claims against the second party (the insurance company).
  • Legal Mandate – Most states do not legally require car owners to purchase first-party car insurance.

Third-Party Car Insurance

Whereas first-party car insurance refers to insurance covering the first party for auto damages, third-party car insurance refers to insurance covering the third party. In other words, any third party injured or otherwise affected in a car accident will receive compensation from the first party’s car insurance company. Thus, third-party coverage is also known as liability coverage.

Suppose you rear-end the vehicle in front of you during a foggy night. With third-party car insurance, your insurance company is held liable for the cost of any damages to the third party’s vehicle. This saves you from having to cover the third party’s vehicle damage out of pocket.

Take a look below at how third-party car insurance breaks down under the same categories we used to better understand first-party coverage:

  • Definition – Third-party car insurance covers any damages sustained by a third party due to a first party’s actions.
  • Buyer – Third-party insurance coverage is purchased by the insured vehicle owner, not by the third party. When a car owner purchases third-party insurance, it’s to prevent themselves from being held financially liable for any third-party injuries or damages that occur in the event of an accident.
  • Filer – The third party must file third-party insurance claims against the first party. The first party’s car insurance then covers the costs of any damages the third party incurred.
  • Legal Mandate – Every U.S. state, aside from New Hampshire and Virginia, requires drivers to have a third-party insurance policy.

Now that we’ve covered the difference between first and third-party car insurance let’s look at the specific policies available under each insurance type.

First-Party Car Insurance Types

Choosing a first-party car insurance policy that’s best for you will depend on your budget, the amount you drive, and the amount of protection you want. Some typical policy types are:

  • Collision Coverage – This type of car insurance helps you pay to repair or replace your car in the event of an accident with another vehicle or if you hit another object, such as a fence or tree.
  • Comprehensive Coverage – Similar to collision coverage, this type of insurance covers damages to your car sustained from an auto accident. However, it also covers damages to your vehicle resulting from accidents other than collisions, including natural disasters and vandalism.
  • Uninsured or Underinsured Motorist Coverage – This type of first-party insurance may help you pay for medical expenses if you’re hit by a driver who doesn’t have insurance or a driver whose insurance limit can’t cover the entire costs of your bills.

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Third-Party Car Insurance Types

Third-party liability coverage consists of two categories:

  • Bodily Injury Liability Coverage – This type of liability insurance covers bodily injury costs sustained by a third party. These costs can include hospital stays, lost wages, and treatment for both physical and psychological pain.
  • Property Damage Liability Coverage – This form of liability insurance covers property damage costs to a third party’s damaged vehicle, as well as other damaged property, such as mailboxes and yards.

Insurance Costs

Car insurance costs vary based on many factors, including your age, driving record, and even your gender. However, on average, drivers in the U.S. can expect to pay $565 per year for minimum coverage, which typically only entails liability insurance.

Comprehensive insurance costs considerably more – about $1,674 per year in the U.S. However, this type of coverage may ultimately save you money in the long run by covering the cost of vehicle repairs or replacement after an accident.

Fortunately, you can take steps to help lower your insurance costs, so you don’t have to compromise on your coverage because of your budget. Some ways you can reduce your costs include:

  • Maintaining a safe driving record
  • Taking a defensive driving course
  • Improving your credit score
  • Bundling your insurance policies
  • Shopping around for the best rates
  • Exploring options for discounts

Why is Car Insurance Necessary?

When you purchase a car, you agree with your state to abide by their imposed rules and regulations regarding car ownership, including having your own car insurance. However, driving without the proper car insurance coverage can lead to severe consequences. In some cases, you may face heavy fines for failing to maintain coverage.

Why does your state care so much about car insurance?

Ultimately, the state requires you to have car insurance because owning and driving a vehicle is a huge responsibility. By requiring every driver to have at least liability insurance, states can ensure all their citizens (including you) receive financial assistance if their property sustains damage in an auto accident. As a car owner, you’re required to accept responsibility for any damage you cause by maintaining your minimum auto insurance.

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Find the Best Auto Insurance for You

Purchasing a car is a significant accomplishment. But before you step on the gas, it’s essential to understand the differences between first and third-party car insurance. The last thing you want is to get into an accident without knowing what your auto insurance covers and what you’ll have to pay out of pocket.

We can compare car insurance rates for you by answering a few simple questions, ensuring you receive the most comprehensive coverage for the most affordable price. And while you’re at it, use our free quote comparison tool to check out what rates you can receive on other types of insurance, including home insurance, health insurance, and even pet insurance.

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