Liability insurance

Liability insurance is a part of the general insurance system of risk financing to protect the purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims. It covers the insured in the event that they are sued for claims that come within the coverage of the insurance policy.

Overview

Liability insurance is designed to offer specific protection against third-party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty to defend the insured. The legal costs of a defense normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defense costs tend to soar when cases go to trial.

Types of Liability Insurance

There are several types of liability insurance, including:

General Liability Insurance

General liability insurance, often referred to as commercial general liability (CGL), protects businesses from financial loss should they be liable for property damage or personal and advertising injury caused by the services, business operations, or employees. It covers non-professional negligent acts.

Professional Liability Insurance

Professional liability insurance, also known as errors and omissions (E&O) insurance, covers policyholders for claims made against them while performing their professional duties. This is particularly important for professionals such as accountants, attorneys, insurance agents, architects, engineers, and technology companies.

Product Liability Insurance

Product liability insurance is for businesses that manufacture products for sale on the general market. Product liability insurance protects against lawsuits arising from injury or death caused by their products.

Directors and Officers Liability Insurance

Directors and officers liability insurance (D&O) protects corporate officers and directors from claims which may arise from decisions and actions taken within the scope of their regular duties. These policies cover the personal liability of company directors and officers as individuals, but also the reimbursement of the insured business in case it has paid the claim of a third party on behalf of its managers.

Employer Liability Insurance

Employer liability insurance, part of workers' compensation insurance, covers business-related injuries or diseases that might not be covered by workers' compensation insurance. This is different from workers' compensation and is designed specifically to protect the employer against liability arising from injuries sustained by employees.

Importance of Liability Insurance

Liability insurance is crucial for those who are prone to being sued for negligence or for unintentional accidents that occur on their property or during their operations. It provides financial protection and peace of mind for individuals and businesses alike.

Legal Requirements

In many countries, certain types of liability insurance are a legal requirement for certain types of businesses. This is particularly true for businesses that operate vehicles, where a minimum level of liability insurance is a legal requirement.

Challenges and Considerations

Choosing the right amount and type of liability insurance can be challenging. Policyholders must consider multiple factors, including the nature of their business, the perceived risk, and the state legal requirements. Additionally, as with any contract, understanding the terms and conditions of the insurance policy is crucial.