What does Direct Action mean? Read on to discover the definition & meaning of the term Direct Action - to help you better understand the language used in insurance policies.
A lawsuit between an injured party and the tortfeasor's liability insurer for payment under a liability policy. Basic contract law provides that only parties that are in privity of contract have "standing," or the right, to file suit to have that contract enforced. In the insurance context, this means that only the policyholder has standing to enforce a liability policy issued by a liability insurer. If the policyholder injures a third party, that third party is not in privity of contract with the liability insurer, and at common law, the injured third party has no standing to file suit directly against the insurer to enforce the insurer's indemnity obligations. Because courts refused to allow injured parties to directly sue liability insurers, some state legislatures enacted special statutes, called "direct action" statutes, which authorize injured parties to directly sue a tortfeasor's liability insurer. However, the injured party must meet all of the statutory requirements in order to proceed with a direct action. Typically, state "direct action" statutes require that the injured party must file one lawsuit against the tortfeasor, obtain a judgment against the tortfeasor, and file a second lawsuit against the tortfeasor's liability insurer within a set amount of time (e.g., 30 days) from the date on which the judgment is entered.
We hope the you have a better understanding of the meaning of Direct Action.