What Is Liability Insurance?
Liability insurance provides the insured party with protection against claims resulting from injuries and damage to people or property. 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.
Liability insurance is also called third-party insurance.
How Liability Insurance Works
Liability insurance is critical for those who may be held liable for injuries to others, or in the event that the insured party damages someone else's property and is considered to be at fault. Liability insurance 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.
A product manufacturer may purchase product liability insurance to cover them if a product is faulty and causes damage to the purchasers or any other 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. And when it comes to auto insurance, 49 out of the 50 states as well as D.C. all require drivers to have some form of liability insurance coverage in case of an accident or injury.
According to the 2017 data from the Insurance Information Institute, the United States is the largest market for commercial liability insurance. 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 USD in 2017—the highest it's been since 1994.
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:
- Employer’s liability and workers' compensation is mandatory coverage for employers which protects the business against liabilities arising from injuries or the death of an employee.
- 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.
- 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 covers a company's board of directors or officers against liability if the company should be 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 policies are personal liability policies designed to protect against catastrophic losses. Umbrella liability coverage generally kicks in when the liability limits of other insurance are reached.
- Commercial liability insurance is 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) policies are 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 can 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.
The comprehensive policy provides compensation for defending or investigating a lawsuit, court costs including attorneys' fees, police report costs and witness fees, any judgment or settlement resulting from the lawsuit, medical expenses for the injured persons, etc. Insurers retain the right to defend any suit against the insured company arising from bodily or property damages.
- Liability insurance provides protection against claims resulting from injuries and damage to people and/or property.
- Liability insurance 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.
Closing the Gaps in General Liability Insurance
Commercial general liability insurance protects against most legal hassles, but it won't protect directors and officers from being sued, and it won't protect the insured against errors and omissions. Companies require special policies for these cases. Below, are lesser-known liability insurance policies worth considering for special professional coverage.
Errors and omissions liability insurance (E&O) offers coverage for lawsuits arising from rendering negligent professional services or failing to perform professional duties. Lawyers, accountants, architects, engineers, or any business providing a service to a client for a fee should purchase this form of insurance.
This kind of policy does not cover criminal prosecution, acts deemed to be fraudulent or dishonest, or any claim against bodily injury. The insured, however, is covered for attorney fees, court costs, and any settlements up to the amount specified by the insurance contract.
Directors and officers (D&O) insurance provide protection to directors and officers of large companies against legal judgments and costs arising from unlawful acts, erroneous investment decisions, failure to maintain the property, releasing confidential information, hiring and firing decisions, conflicts of interest, gross negligence, and other errors.
There are three different types of coverage—personal/employee coverage, corporate coverage, and entity coverage—that provide companies with varying degrees of insurance protection. Most D&O policies exclude coverage for fraud or other criminal acts. Factors such as the size and form of the company, location, mergers and acquisitions, industry type and loss experience determine the premium rates in a typical D&O policy.
Why Buy Personal Liability Insurance?
Personal liability insurance policies are purchased primarily by high-net-worth individuals 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.
Personal liability insurance makes sense for individuals who have a higher-than-average risk of being sued, such as landlords.
Homeowners insurance covers liability claims from accidents that occur on a policyholder's property, but only to a specified limit. Homeowners facing fees beyond that amount could face financial disaster.
Commonly called an umbrella insurance policy, personal liability insurance makes payments on the policyholder's behalf in cases of property and auto accidents, as well as situations that involve libel, slander, vandalism, or invasion of privacy. The policy also covers injuries that occur at secondary residences or seasonal homes, within recreational vehicles, on the premises of rental properties, or on a boat or watercraft owned by the policyholder.
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.