Liability insurance is an invaluable insurance product that ensures protection against claims resulting from injuries and damage to other people or property. These policies cover any legal costs and payouts an insured party is responsible for if they are found legally liable, though they typically do not cover intentional damage and contractual liabilities.
Uniquely, liability insurance policies pay third parties, not the policyholders themselves.
Key Takeaway
- Liability insurance provides protection against claims resulting from injuries and damage to other people or property.
- It covers legal costs and payouts for which the insured party would be found liable.
- Provisions not covered include intentional damage, contractual liabilities, and criminal prosecution.
- Often required for automotive insurance policies, product manufacturers, and professionals practicing medicine or law.
- Types of liability insurance include personal liability, workers’ compensation, and commercial liability.
How Liability Insurance Works
Liability insurance is crucial for individuals or entities that may be held at fault for injuries sustained by others or damages to other people’s property. Known also as third-party insurance, it helps to insulate policyholders from large financial liabilities. However, it does not cover intentional or criminal acts.
For instance, most states require vehicle owners to have liability insurance to cover injury to other people and property in the event of accidents. Product manufacturers often purchase product liability insurance to cover costs if their products cause damage or injury. Business owners use liability insurance to protect themselves in the event an employee is injured during operations, and medical professionals utilize it to guard against malpractice claims.
Special Considerations
Personal liability insurance is usually purchased by high-net-worth individuals or those with considerable assets, though it’s advisable for anyone whose net worth exceeds their existing coverage limits. Bundled coverage packages often come with reduced rates. While it provides secondary protection, specific coverage limits on home or auto policies may be required, resulting in extra costs.
The global liability insurance market was valued at over $25 billion in 2021 and is expected to reach $433 billion by 2031. Although comprehensive general liability insurance offers broad coverage, it does not protect directors or officers from certain legal issues or instances of professional mistakes. Special policies such as Errors and Omissions Liability Insurance and Directors and Officers Insurance fill these gaps.
Specialized Coverage:
- Errors and Omissions Liability Insurance (E&O): Protects professionals like lawyers, accountants, and architects from lawsuits arising from negligence or failure to perform their duties. Generally does not cover fraudulent or criminal acts.
- Directors and Officers (D&O) Insurance: Protects directors and officers from legal judgments and costs arising from wrongful acts, economic errors, and management decisions.
Types of Liability Insurance
Business owners, especially, require diverse liability insurance policies to cover various risks. Here are some key types:
- Employer’s Liability and Workers’ Compensation: Mandatory for employers, protecting against claims from employee injuries or deaths.
- Product Liability Insurance: Protects businesses if products cause harm or injury.
- Indemnity Insurance: Covers claims of financial harm due to negligence.
- Director and Officer Liability Insurance: Protects the leadership against liability claims.
- Umbrella Liability Policies: Offer additional coverage beyond standard insurance limits.
- Commercial General Liability Insurance: Comprehensive coverage for SMEs from injuries or property damage.
Differences Between Personal and Business Liability Insurance
Personal liability insurance covers individuals against personal claims for injury or property damage, while business liability insurance protects companies from similar claims, including product defects and recalls.
What Is Umbrella Insurance?
Umbrella insurance provides additional liability coverage beyond the limits of existing policies like homeowners or auto insurance. Generally affordable, coverage is often available in increments of $500,000 or $1 million.
What Is Backdated Liability Coverage?
Backdated liability coverage offers protection for events leading to claims that occurred before the policy’s purchase. These rare policies are generally only available to businesses. }
Related Terms: third-party insurance, product liability, workers’ compensation, umbrella insurance, errors and omissions insurance.
References
- Allied Market Research. “Liability Insurance”.
- U.S. Department of Labor. “Workers Compensation”.
