Insured vs. Insured on Same Policy Is 1st-Party Claimant

Insured vs. Insured on Same Policy Is 1st-Party Claimant

William Barker  By William T. Barker, Partner, SNR Denton

In Loudin v. National Liability & Fire Insurance Co., 716 S.E.2d 696 (W. Va. 2011), the West Virginia Supreme Court held that policyholder making a liability claim against another insured on the policy is a first-party claimant, entitled to sue for allegedly inadequate or delayed payment of damages suffered.  This commentary examines and criticizes that holding in light of the uniformly contrary authority elsewhere.

The commentary summarizes the facts as follows:

Thomas Loudin and his brother, William, were doing maintenance on Thomas's truck when William accidentally backed the truck over Thomas, seriously injuring him.  National Liability & Fire Insurance Company ("National") insured the truck and promptly paid Thomas the $5000 limit of its medical payment coverage.  Thomas also requested payment based on William's liability for his injuries, which National refused to make.  Thomas then sued William and National.  National settled the claim against William for $150,000, well within the $1,000,000 policy limit.  National then obtained summary judgment that Thomas was, with respect to amounts based on William's alleged liability, a third-party claimant, not entitled to sue for breach of contract, bad faith, or unfair trade practices.

The supreme court reversed, reasoning that Thomas, as a premium-paying policyholder was a first-party claimant under the insurance policy, even though a third-party claimant against William.  It did so even though it recognized that cases in other jurisdictions uniformly hold to the contrary.

The commentary argues that the court ought to have looked to the distinction between first-party insurance and third-party insurance, which has been summarized as follows:

We use the term "first party" to refer to an insurance agreement where the insurer agrees to pay claims submitted to it by the insured for losses suffered by the insured. . . . In contrast, a "third party" situation is one where the insurer contracts to defend the insured against claims made by third parties against the insured and to pay any resulting liability, up to the specified dollar limit.

The commentary argues that, even when the third-party claimant is also a policyholder, the relevant promise made in a liability insurance policy is different from the promise made to an insured under a first-party policy.  Taking account of this difference and of the public policy reasons for not permitting bad faith claims by third-party claimants generally, the commentary argues that Loudin is poorly reasoned and ought not to be followed by courts in other states.

William T. Barker is a partner in the Chicago office of SNR Denton, L.L.P., with a nationwide practice representing insurers in complex litigation, including matters relating to coverage, claims handling, sales practices, risk classification and selection, agent relationships, and regulatory matters. He is a member of the Editorial Board of the New Appleman on Insurance Law Library Edition and a Consulting Author of the New Appleman Insurance Law Practice Guide. He has published over 100 articles and speaks frequently on insurance and litigation subjects. He was a Contributing Editor and then Editor of Bad Faith Law Report until that publication merged with Insurance Litigation Reporter, where he is currently Senior Contributing Editor and Editorial Board Director. He has been described as the leading lawyer commentator on the connections between procedure and insurance. See Charles Silver & Kent Syverud, The Professional Responsibilities of Insurance Defense Lawyers, 45 Duke L.J. 255, 257 n.4 (1995). Mr. Barker is a member of the American Law Institute.

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