The term liability insurance refers to an insurance product that protects an insured party from claims resulting from injuries and property damage to others. Liability insurance policies cover any legal costs and payouts incurred if an insured party is found legally liable. In general, liability insurance policies do not cover intentional damage or contractual liabilities. Liability insurance policies, unlike other types of insurance, pay third parties rather than policyholders.
The Basics of Liability Insurance
Liability insurance(also known as third-party insurance) is intended to provide specific protection against third-party insurance claims, i.e., payment is typically made to someone suffering loss who is not a party to the insurance contract, rather than to the insured. In general, liability insurance policies do not cover damage caused intentionally or contractual liability. When a claim is filed, the insurance carrier is obligated (and has the right) to defend the insured.
Unless the policy expressly states otherwise, the legal costs of defense do not normally affect policy limits; this default rule is useful because defense costs tend to skyrocket when cases go to trial. In many cases, the defense portion of the policy is more valuable than the insurance, because in complicated cases, the cost of defending the case may be greater than the amount claimed, particularly in so-called “nuisance” cases in which the insured must be defended even if no liability is ever brought to trial.
Personal liability insurance policies are typically purchased by high-net-worth individuals or those with substantial assets, but this type of coverage is recommended for anyone whose net worth exceeds the combined coverage limits of other personal insurance policies, such as home and auto insurance. Although most carriers offer discounted rates for bundled coverage packages, the cost of an additional insurance policy does not appeal to everyone. Personal liability insurance is considered a secondary policy, and policyholders may be required to carry certain limits on their home and auto policies, which may result in additional costs.
Liability Insurance Types
The following are the most common types of liability insurance:
- Employer’s liability and workers’ compensation are required coverages for employers that protect the company from liabilities arising from employee injuries or death.
- Indemnity insurance protects a company from negligence claims resulting in financial harm as a result of mistakes or failure to perform.
- Product liability insurance is designed for businesses that manufacture products for general sale. Product liability insurance shields companies from lawsuits resulting from injuries or deaths caused by their products.
- Personal liability policies designed to protect against catastrophic losses are known as umbrella liability policies. When the liability limits of other insurance are reached, coverage generally kicks in.
- Director and officer liability insurance protects a company’s board of directors or officers from legal liability if the company is sued. Even though corporations generally provide some level of personal protection to their employees, some companies provide additional protection to their executive team.
- A standard commercial general liability policy, also known as comprehensive general liability insurance, is commercial liability insurance. It provides insurance coverage for lawsuits arising from employee and public injury, property damage caused by an employee, and injuries sustained as a result of an employee’s negligent action. Intellectual property infringement, slander, libel, contractual liability, tenant liability, and employment practices liability may also be covered by the policy.
- Comprehensive general liability policies can be tailored to any size or type of business, partnership or joint venture, corporation or association, organization, or newly acquired business. Bodily injury, property damage, personal and advertising injury, medical payments, and premises and operations liability are all covered by insurance. Insurers cover compensatory and general damages but not punitive damages in lawsuits.