What Is Liability Insurance? Overview And Coverage

If you cause an accident on your property or get someone injured on your property, you may be held legally responsible for the resulting costs, such as medical or legal bills. With liability coverage, you get protected from these types of costs, which is why it’s important to understand the liability coverage provided by your insurance policies and the limits that apply. If something unexpected happens, having the proper safeguards in place can help protect you.

Here’s an introduction to liability insurance, what it implies and how it works, and a whole lot more.

What Is Liability Insurance?

Investopedia defines liability insurance as an insurance product that provides an insured party with protection against claims resulting from injuries and damages caused to other people or property. This type of insurance covers any legal costs and payouts an insured party is responsible for if they are found legally liable.

Liability coverage comes into play when the damage or injury is caused by the insured. For instance, if other people get injured in your facility or you damage someone’s property during an accident, your insurance company will incur the expenses.

Liability insurance is made up of two parts:

Bodily Injury coverage – is what pays for any injuries to others from the accident. This includes everything from medical expenses—like doctor visits and physical therapy—to lost wages.

Property Damage insurance – covers damage to someone else’s property. Typically, this would be a vehicle, but it also covers things like someone else’s fence, if you accidentally backed into it.

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Why Do I Need Liability Insurance?

Many types of insurance policies include liability insurance. Usually, it helps pay to repair another person’s property or for their medical bills if the policyholder is found responsible for causing the damage or injuries.

Liability insurance can help to reduce the likelihood of your company being sued, but it can never completely eliminate the risk. You or a member of your organization could make a mistake that causes injury or property damage. Your error could jeopardize a customer’s, client’s, competitor’s, or general public member’s reputation or privacy. You may be legally liable to pay damages to someone who suffers a loss as a result of your actions or inaction when such injuries occur.

A lawsuit could bankrupt your company depending on the extent of the harm, the number of people injured, and/or the value of the property damaged. Even if your company is ultimately found not guilty of any wrongdoing, a persistent plaintiff can keep you entangled in legal proceedings for a long time, costing you a lot of money to defend yourself. Liability insurance covers the cost of your defense while also safeguarding your assets.

Types of Liability Insurance

Business owners are often exposed to a variety of liabilities which can subject their assets to substantial claims. Therefore, 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:

1. Employer’s liability insurance

Employer’s liability covers is a mandatory insurance liability coverage that protects business against liabilities arising from injuries, illness or death of an employee caused by work, on or off site.

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2. Product liability insurance

This type of liability insurance is for businesses that produce products for the public or general market. Product liability insurance protects businesses against lawsuits arisng from injury or death caused by their products.

3. Professional indemnity insurance

Professional indemnity insurance covers any advice you give to a client in a professional capacity. It protects you from any accusation from your client on the grounds of lack of professionalism or poor standard. It also protects a business against negligence claims due to financial harm caused by mistakes or failure to perform at a certain level.

4. Director and officers insurance coverage

D&O liability insurance protects the personal assets of corporate directors and officers, as well as their spouses, in the event that they are personally sued by employees, vendors, competitors, investors, customers, or other parties for actual or alleged wrongful acts in managing a company.

D&O insurance claims are paid to directors and officers of an organization or losses of any sort or repayment off defense cost if legal actions is brought against them.

5. Umbrella liability

This type of liability insurance covers claims in excess of regular homeowners, auto, or watercraft policy coverage. This type of policies are designed to protect against disastrous losses. It coves not just the policyholder, but also members of the family.

6. Commercial liability insurance

This is a standard insurance policy that provides coverage for lawsuits arising from injury to employees and the public. It further covers for property damage caused by an employee as ell as injuries or accidents suffered by employees as a result o negligence.

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7. Comprehensive general liability

This is a business insurance policy that covers customer injuries, customer property damage, and lawsuits related to both is known as comprehensive general liability insurance.

SEE ALSO: What Is Comprehensive Insurance? Overview and Full Coverage

8. Homeowners liability coverage

Homeowners liability coverage provides financial protection if you’re found liable after a guest is injured at your home. Suppose, for instance, a guest slips and falls on your pool deck or a flight of stairs. If you’re found liable for their injuries, liability coverage may help pay for their related medical or legal expenses. This coverage is typically included in a standard homeowners insurance policy, though limits — the maximum amount an insurer will pay toward a covered claim — will apply.

How Does Liability Insurance Work?

Liability insurance is important for those who are liable for injuries sustained by other people or in the event that the insured party damages someone’s property. This type o insurance does not cover intentional or criminal acts been when the insured party is legally responsible.

Anyone who owns a business, drives a car, practices medicine, or practices law—basically anyone who can be sued for damages and/or injuries—takes out a policy. The insured and third parties who may be injured as a result of the policyholder’s unintentional negligence are both covered by the policy.

For example, most states require that vehicle owners have liability insurance under their automotive insurance policies to protect injury to other people and property in the event of accidents.

For someone who is a product manufacturer, he/she 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 can also 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 professional liability insurance.

Personal liability insurance is typically purchased by high-net-worth individuals (HNWIs) or those with significant assets, but it is also 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, resulting in additional costs.

What Doesn’t Liability Insurance Cover?

Liability coverage typically doesn’t pay to repair damage to your own car after an accident — collision coverage helps with that. It also doesn’t pay to repair damage caused by other factors, such as hail, which may be paid by comprehensive coverage.

Liability coverage also does not extend to costs associated with your own injuries after an accident you cause. If you want this type of coverage, you may want to consider medical payments coverage. Your insurance agent can help answer questions about auto liability insurance or your state’s coverage requirements.

Talk to a local insurance agent to discuss your options and choose appropriate liability coverage limits for your situation.

How Much Does Liability Insurance Cost?

The amount you’ll pay for liability insurance is based on a number of factors, including how much coverage you purchase. The higher your coverage limit, the more you’ll likely pay for liability insurance. Your insurance agent can tell you how much your coverage will cost if you adjust your limit.

How Much Liability Insurance Should I Buy?

The amount of liability insurance you should buy solely depends on your situation, how much you can afford to pay and how much risk you are willing to take on.

You’ll be given a few options of how much liability coverage available for you to choose from. These are called limits, and when you choose one, you’re choosing the maximum amount of Liability your insurer will pay in an accident. 

Higher limits mean your insurer pays out more, so you have a higher insurance rate. Lower limits mean your insurer pays out a lower amount, so you’ll have a lower insurance rate. 

For instance, if you do cause an accident, and there are costs that go above and beyond your limits, you could be stuck covering them. That is to say, if your limit is $100,000 and the cost of an accident is $105,000, you could be responsible for the extra $5,000. So, the idea is that the higher your limit, the less likely you’ll have to pay anything out of pocket.

The good news is you select the limits you’re most comfortable with for both risk and cost.

Summarily, any costs that exceed your liability coverage limits are your responsibility. Therefore, it may be a good idea to increase your auto liability limits above the state’s minimum requirements by purchasing more coverage.

Final Thoughts

Industry and businesses are built on a variety of processes and activities that can have an impact on others (members of the public, visitors, trespassers, sub-contractors, etc. who may be physically injured or whose property may be damaged or both).

Whether either or both employer’s liability insurance and public liability insurance are required by law varies from state to state. Regardless of compulsion, most companies include public liability insurance in their insurance portfolio, despite the fact that the standard policies’ conditions, exclusions, and warranties can be a burden.


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