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What Is Liability Insurance?

Liability insurance shields individuals and businesses from claims arising from injuries and damage caused to people or property. This form of protection is vital for anyone who can be held legally accountable. Liability insurance policies take care of legal expenses and payouts when an insured party is found responsible, though these policies typically do not cover intentional damage or contractual liabilities. Unique among insurance types, liability policies are designed to compensate third parties rather than policyholders.

Key Takeaway

Liability insurance protects the insured from claims due to injury or damage to people or property, covering legal costs and payouts if found legally liable.

It pays third parties, not policyholders, and does not cover intentional damage or contractual liabilities.

Various types, including personal and business liability insurance, cover individuals and companies against different risks and potential lawsuits.

Umbrella insurance provides additional coverage beyond standard home, auto, and watercraft policies, typically in increments of $500,000 or $1 million.

Backdated liability insurance covers claims that occurred before the policy was purchased, though it's generally only available to businesses.

Understanding the Mechanics of Liability Insurance

Liability insurance is crucial for those responsible for injuries to others or for damaging another person'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. These policies protect the insured and third parties who might be injured due to the policyholder's unintentional negligence.

Important

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.

Special Considerations for Liability Insurance Coverage

High-net-worth individuals often buy personal liability insurance, but it's recommended for anyone whose net worth surpasses their home or auto insurance limits.

Many find extra insurance costly, but most providers offer discounts for bundled packages. Personal liability insurance is secondary, often needing specific limits on home and auto policies, which can increase costs.

Fast Fact

The global liability insurance market size was valued at more than $25 billion in 2021, and is expected to reach $433 billion by 2031.

Commercial general liability insurance covers most legal issues, but not lawsuits against directors and officers or against errors and omissions. Companies require special policies for these cases, including:

Exploring Different Types of Liability Insurance Coverage

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:

How Does Personal Liability Insurance Differ From Business Liability Insurance?

Personal liability insurance covers individuals against claims resulting from injuries or damage to other people or property experienced on the insured's property or as a result of the insured's actions. Business liability insurance instead protects the financial interests of companies and business owners from lawsuits or damages resulting from similar accidents, but also extending to product defects, recalls, and so on.

What Is Umbrella Insurance?

An umbrella insurance policy is additional liability insurance coverage that is purchased and goes beyond the dollar limits of the insured's existing homeowners, auto, or watercraft insurance. Umbrella policies tend to be affordable and offered in increments of $500,000 or $1 million.

What Is Backdated Liability Coverage?

Usually, you must have liability coverage in place when an event happens that results in a claim. Backdated liability insurance, however, is insurance that provides coverage for a claim that occurred before the insurance policy was purchased. These policies are uncommon and usually available only to businesses.