Liability insurance (also called third-party 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 protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy. The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium.
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 (and right) 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.
In many cases, the defense portion of the policy is actually more valuable than the insurance, as in complicated cases, the cost of defending the case might be more than the amount being claimed, especially in so-called “nuisance” cases where the insured must be defended even though no liability is ever brought to trial.
Liability insurance policies cover both legal costs and any payouts for which the insured party would be responsible if found legally liable. Intentional damage and contractual liabilities are generally not covered in these types of policies.
Business owners are exposed to a range of liabilities, any of which can subject their assets to substantial claims. All business owners need to have an asset protection plan in place that’s built around available liability insurance coverage.
Main types of liability insurance:
- Employer’s Liability and Workers’ Compensation : Mandatory coverage for employers which protects the business against liabilities arising from injuries or the death of an employee.
- Product Liability Insurance : 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.
- Indemnity Insurance : Provides coverage to protect a business against negligence claims due to financial harm resulting from mistakes or failure to perform.
- Director and Officer Liability Coverage : Insurance covers a company’s board of directors or officers against liability if the company is sued. Some companies provide additional protection to their executive team even though corporations generally provide some degree of personal protection to their employees.
- Umbrella Liability Policy : A personal liability policy designed to protect against catastrophic losses. Umbrella liability coverage generally kicks in when the liability limits of other insurance are reached.
- Commercial Liability Insurance : A standard commercial general liability policy also known as comprehensive general liability insurance. It provides insurance coverage for lawsuits arising from injury to employees and the public, and property damage caused by an employee, as well as injuries suffered by the negligent action of employees. The policy may also cover infringement on intellectual property, slander, libel, contractual liability, tenant liability, and employment practices liability.
- Comprehensive General Liability (CGL) Policy : Tailor-made for any small or large business, partnership or joint venture businesses, a corporation or association, an organization, or even a newly acquired business. Insurance coverage in a CGL policy includes bodily injury, property damage, personal and advertising injury, medical payments, and premises and operations liability. Insurers provide coverage for compensatory and general damages for lawsuits. Punitive damages are generally not covered, although they may be if they are permitted by the jurisdiction in which the policy was issued. The amount of risk associated with the business and the size of the business determines the total coverage.