When it comes to automobile accidents and claims under insurance policies, it is iimportant to differentiate the relationship of the parties. First parties are those in direct contractual relationship with the insurance company, i.e., "the Insured". Third parties are those outside of the insurance relationship. In diminished value matters, the first party is typically the person responsible for the collision and whose insurance company will pay the claims. A third party is typically the person not responsible for the collision. In other words, the first party is the tortfeasor (one at fault) causing damage to the third party.

While this may seem academic, it has great practical significance. If you are the first party seeking recovery for diminished value to your vehicle, your right to recover is governed by the terms of your policy. Why? Because you right of recovery is based on contract law. As the insurance policy is a contract, the terms of the contract govern unless they are ambiguous or violate public policy.

Third parties, conversely, have the right to recover against the person causing the accident based on tort law. A third party's recovery is not limited by the terms of an insurance contract to which that person has no connection. Instead, tort law demands that the injured party be "made whole". As the decrease in the third party's vehicle's value is part of the damage caused by the tortfeasor, the third party is certainly entitled to seek compensation for that decrease in value.

Many insurers recognize third party diminished value and pay those claims without protest. in some circumstances, the insurer may assert that it has no obligation to pay for any  diminished value loss found to have been caused by its insured based on the terms of the policy. However, that policy cannot prevent the injured party from seeking recovery for diminished value loss directly from the insured/tortfeasor, much as a party can recover damages in excess of the limits of an insurance policy. Nonetheless, the insurer has a obligation to defend its insured in a lawsuit brought by the third party related to the collision. Keeping in mind the financial cost of fulfilling the duty to defend and the possibility of facing a "bad faith" claim brought by its insured are often incentives for insurers to pay the diminished value suffered by the third party.

Another wrinkle in the first party/third party analysis arises if you seek recovery through your own policy under the uninsured/underinsured motorist coverage rather than under your collision coverage. Although you are seeking payment under your own policy, in these circumstances, you typically are not subject to the limitations contained in the collision coverage, as you are not "at fault".

In the end, consumers need to pay attention to their rights as both first and third parties, and they need to ask questions. If there is something you do not understand, ask. And get the response in writing. Written confirmation always goes a long way toward understanding what you have been told and determining whether that statement is accurate. If you are claiming as a third party and are told that state law or the insured's policy does not allow payment to you for diminished value, demand the law in writing. As to the policy, that is between the insurer and the insured. It has no application to you.