Liability Insurance

What Is Liability Insurance?

The term liability insurance refers to an insurance product that provides an insured party with protection against claims resulting from injuries and damage to other people or property. Liability insurance policies cover any legal costs and payouts an insured party is responsible for if they are found legally liable. Intentional damage and contractual liabilities are generally not covered in liability insurance policies. Unlike other types of insurance, liability insurance policies pay third parties — not policyholders.

How Liability Insurance Works

Liability insurance is critical for those who are liable and at fault for injuries sustained by other people or in the event that the insured party damages someone else's property. As such, liability insurance is also called third-party insurance. Liability insurance does not cover intentional or criminal acts even if the insured party is found legally responsible. Policies are taken out by anyone who owns a business, drives a car, practices medicine or law — basically anyone who can be sued for damages and/or injuries. Policies protect both the insured and third parties who may be injured as a result of the policyholder's unintentional negligence.

Liability insurance is also called third-party insurance.

For instance, most states require that vehicle owners have liability insurance under their automotive insurance policies to cover injury to other people and property in the event of accidents. A product manufacturer may purchase product liability insurance to cover them if a product is faulty and causes damage to the purchasers or another third party. Business owners may purchase liability insurance that covers them if an employee is injured during business operations. The decisions doctors and surgeons make while on the job also require liability insurance policies.

Personal liability insurance policies are purchased primarily by high-net-worth individuals (HNWIs) or those with sizeable assets, but this type of coverage is recommended to anyone with a net worth that exceeds the combined coverage limits of other personal insurance policies, such as home and auto coverage. The cost of an additional insurance policy doesn't appeal to everyone, although most carriers offer reduced rates for bundled coverage packages. Personal liability insurance is considered a secondary policy and may require policyholders to carry certain limits on their home and auto policies, which may result in additional expenses.

According to data from the Insurance Information Institute, the United States is the largest market for commercial liability insurance. For instance, there were $86.6 billion in liability claims written across the country in 2014, followed by $10.6 billion in the United Kingdom. The global liability insurance market has seen a lot of movement in the last two decades. Statista reported the market hit a total of $3.3 billion in 2017 — the highest it's been since 1994.

Special Considerations

Although commercial general liability insurance protects against most legal hassles, it doesn't protect directors and officers from being sued, and it doesn't protect the insured against errors and omissions. Companies require special policies for these cases including:

Types of Liability Insurance

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.

Here are the main types of liability insurance: