What Is Third-Party Liability and How Does It Work?

What Is Third-Party Liability and How Does It Work?

Third-party liability ensures that responsible insurers abide by their obligations in the event of an accident-related injury. Learn more about third-party liability and how it could impact your clients’ finances in the event of certain illnesses and injuries.

While most health plans and healthcare organizations only want the best for their members, there are times where they are not responsible for a claim. Instead, another company or insurer should make payments due to the circumstances surrounding the member’s injury or illness. Read on to learn more about third-party claims and how they can impact your clients’ financial bottom line.

What Is Healthcare Third-Party Liability?

While your health plan typically covers your treatment, there are situations where another insurance company or party is responsible for a member’s healthcare expenses. For example, if someone suffers injuries during a car, motorcycle, workplace, or other accident, another insurance policy may be legally obligated to cover the claim. In the insurance and legal industries, these claims are referred to as third-party liability claims.

How Do Health Plans Manage Third-Party Liability Claims?

Health plans routinely review their members’ claims, looking for other payment sources. While company employees sometimes review these records, companies also have sophisticated software that searches electronic health data for reports of motor vehicle accidents and workers’ compensation claims.

When a health plan believes that a claim may involve third-party liability, they will typically send the member a letter requesting information about their injury and potential claims. If it becomes clear that third-party liability exists, the health plan may seek reimbursement from the other insurance company or file a legal claim or lien demanding payment.

If the other insurance company has disputed the member’s claim, some health plans will agree to make conditional payments during the dispute. If the dispute is settled or a court sides with the member, the health plan will typically get repaid. If it is determined that a bill is not the other insurer’s responsibility, the health plan will cover the care.

California law also imposes limitations on a healthcare organization’s ability to recover funds in a personal injury lawsuit. Typically, a health plan that uses capitation cannot recover more than 80% of their usual and customary charges or one-third of the member’s settlement (whichever number is lower).

How Can Third-Party Liability Claims Curb Ballooning Healthcare Costs?

Most, if not all, of us realize that healthcare costs are skyrocketing in California. According to the Peterson-Kaiser Health System Tracker, healthcare spending now outpaces our country’s economic growth and has increased by more than 600% per capita since 1970. Health plans and other healthcare organizations realize that they need to use every possible tool to reduce their costs. Every time a health plan pays for care that is not their responsibility, its costs go up.

For example, Medicaid and Medicare are supposed to be payers of last resort, meaning that providers should always bill other sources of coverage before making a Medicaid or Medicare claim. Because roughly 15% of government-funded healthcare beneficiaries have another source of healthcare coverage, state and federal agencies realized that they needed to aggressively manage third-party liability claims. The results have been remarkable. In 2011, state Medicaid programs, including Medi-Cal, recovered more than $72 billion in third-party liability claims. In comparison, they only recouped $34 billion in 2001, increasing their savings by 114% over a decade.

Canopy Health: Refreshingly Clear, Human Care

Canopy Health is committed to improving healthcare transparency and the member experience in the Bay Area. If you’d like to learn more about our robust alliance of hospitals and physicians, our carrier partners, or our passion for healthcare literacy, contact us online or at 888-8-CANOPY.


California Civil Code § 3040. Retrieved from https://codes.findlaw.com/ca/civil-code/civ-sect-3040.html

Department of Health and Human Services. (2013, January). Medicaid Third-Party Liability Savings Increased, but Challenges Still Remain. Washington, D.C. Retrieved from https://oig.hhs.gov/oei/reports/oei-05-11-00130.pdf

Kamal, R., & Cox, C. (2018, December 10). How has U.S. spending on healthcare changed over time? Peterson-Kaiser Health System Tracker. Retrieved from https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/#item-per-enrollee-spending-growth-has-slowed-recently-for-all-major-payers_2017