First-Party Coverage

Daisy Rogozinsky
June 13, 2022

If you file for bankruptcy, the money you receive from a first-party insurance policy is considered part of your bankruptcy estate. In this article, we’ll define “first-party coverage” and explain its role in bankruptcy proceedings.

Key Takeaways

  • First-party coverage is coverage that applies to the insured person’s own property or person
  • Third-party coverage covers a person from claims made against them by another party
  • Renter’s insurance and health insurance are examples of first-party coverage
  • Auto liability insurance is an example of third-party coverage
  • First-party insurance proceeds are considered part of a bankrupt debtor’s estate, but may not necessarily be distributed to creditors
  • Third-party insurance proceeds are not part of a debtor’s estate

What Is First-Party Coverage?

First-party insurance coverage is coverage that applies to the insured person’s own property or person. The “first person” is the person who purchases the insurance policy, pays the premium, and makes claims to receive benefits or compensation. The first person may be an individual, a company, or a group of people. 

First-party coverage differs from third-party coverage, which is an insurance policy that a person purchases to protect against liability for damages or losses that they cause to a third party. Again, here the policyholder may be an individual, company, or group of people.

The second party in both of these scenarios is the insurance company. 

Examples of First-Party Coverage

In first-party coverage, a party makes a claim to their own insurance company. For example, if you were to get sick and make a claim to your health insurance to help compensate you for medical treatment, this would be first-party coverage. Similarly, if you were to make a claim to your renter’s insurance policy after your apartment is damaged in a flood, this would be a first-party claim.

In third-party coverage, a person is covered when another party makes a claim against them. For example, auto liability insurance covers individuals in the case that they injure somebody else in a motor vehicle accident and that person makes a claim against them. Another example would be canine insurance which would protect you if your dog bit somebody and that person wanted to make a claim.

First-Party Coverage in Bankruptcy

In bankruptcy cases, a person’s assets are turned over to a bankruptcy estate to be sold to pay back their creditors. This raises questions of whether insurance policy proceeds are considered to be part of the estate and are eligible to be turned over to creditors. 

Indeed, insurance proceeds of first-person insurance coverage paid directly to a debtor are usually considered to be a part of their bankruptcy estate. If made payable to the debtor rather than a third party such as a creditor, proceeds from first-party policies are recognized as the property of the estate. 

However, policy proceeds are not necessarily available for distribution to creditors. Instead, according to the 2001 case, Landry v. Exxon Pipeline Co, insurance proceeds are distributed only to those whom the state insurance law or the policies themselves give a right to distribution. 

Third-party insurance proceeds are not part of the bankruptcy estate because the debtor is not the intended recipient.

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