Liability Insurance: What It Is, How It Works, Major Types

What Is Liability Insurance?

Liability insurance is an insurance product that provides 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, and not policyholders.

KEY TAKEAWAY

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.
Liability insurance is often required for automotive insurance policies, product manufacturers, and anyone who practices medicine or law.
Personal liability, workers’ compensation, and commercial liability are types of liability insurance.

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.

Special Considerations

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.

The global liability insurance market size was valued at more than $25 billion in 2021, and is expected to reach $433 billion by 2031.1

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:

Errors and Omissions Liability Insurance (E&O): An errors and omissions liability insurance policy covers lawsuits arising from 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. An E&O policy does not cover criminal prosecution, fraudulent or dishonest acts, or claims 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: This type of policy protects directors and officers of large companies against legal judgments and costs arising from unlawful acts, erroneous investment decisions, failure to maintain property, releasing confidential information, hiring and firing decisions, conflicts of interest, gross negligence, and other errors. Most D&O policies exclude coverage for fraud or other criminal acts. Premiums depend on the company, its location, industry type, and loss experience.

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.2
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 cover 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. 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, 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 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 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 but not punitive damages.

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.

Liability Insurance Definition

Liability insurance is a general term to describe different types of insurance coverage that helps protect you or your business if someone files a lawsuit or reports a claim against your company.

What Is Liability Insurance Coverage?

what is liability insurance Liability insurance helps protect you financially if you’re found legally responsible for property damage or personal injury to a third party. This liability protection is part of most home, auto and business insurance packages and customized for different situations.

Business Liability Insurance

There are different types of insurance coverages that you can get to help protect your business from liability claims. Common business liability insurance coverages include:

General liability insurance to help cover claims alleging that your business caused bodily injury or property damage to someone else or their belongings.
Professional liability insurance to help cover your legal costs and judgments made against you if a client sues your business for any mistakes made during professional services your business provides. This coverage is also known as errors and omissions insurance.
Data breach insurance, which helps you respond to a breach if personally identifiable information is stolen from your business. Some insurers may refer to this coverage as cyber liability insurance.
Commercial umbrella insurance to help cover the costs that exceed your underlying liability coverage limits.
Commercial auto insurance to help protect you and your employees on the road if you drive a company-owned car for business. It can help cover someone else’s property damage and injuries if you cause an accident.

Personal Liability Insurance

You may want to consider coverage to help protect you in personal situations, including:

Personal liability insurance to help protect you if someone gets hurt while on your property. It can also help cover you if you’re responsible for damaging another person’s property. This coverage is part of your homeowners or renters insurance policy.
Bodily injury liability insurance to help pay for medical expenses resulting from a car accident that you caused.
Property damage liability coverage to help pay for repair damages from an accident you caused or that you’re found responsible for.
Umbrella insurance, which extends your homeowners and auto liability coverage limits.

How Does Liability Insurance Work?

Depending on the type you have, a liability insurance policy helps protect you or your business from a covered loss. These policies work when:

A loss occurs during your policy period
You file a claim with your insurance company
You have a covered cause of loss

It’s a good idea to check each liability insurance policy you have to make sure you understand how it works. Policies may have exclusions (things that are not covered) and list the types of losses they won’t cover.

Do I Need Liability Insurance?

Nearly all states require that you have auto insurance, which includes liability insurance. This protects you if you injure another party or cause property damage in an accident. Not all states require you to have personal liability coverage, which protects you if someone is injured on your land or property. However, mortgage lenders often require liability coverage in a homeowners insurance policy. In addition, some landlords may also require liability insurance in a renters insurance policy. You may consider having liability insurance coverage to help protect you and your assets against unexpected costly claims.

How Much Liability Insurance Do I Need?

When selecting your coverage limits, you should determine what assets you want to protect, such as your home, savings and investments. It is recommended that you select a coverage limit for your policy that matches or exceeds your net worth so you have enough coverage to protect your assets if someone sues you.

Liability Insurance Minimums and Requirements

Your state may have minimum liability insurance requirements for car insurance policies. State car insurance laws vary, but you’ll likely need to have minimum coverage for:

Bodily injury liability
Property damage liability

For other types of liability insurance, several factors can impact your coverage needs. These include:

Your claims history
Your location
The type of business you have
How many years you’ve been in business

You can work with an insurance agent or specialist to better understand your local laws. This can help you make sure that your coverage complies with state rules.

Liability Insurance Restrictions and Exceptions

Liability insurance helps cover third-party claims of property damage or bodily injury. These policies don’t provide coverage for the policyholder. For example:

Bodily injury liability coverage won’t help cover your medical bills if you get hurt in a car accident that you caused. You’ll need personal injury protection (PIP), also known as no-fault insurance, to protect you in these situations.¹
Property damage liability insurance won’t help pay to repair your car if it’s damaged in an at-fault accident. Collision coverage can help you with this kind of claim.
General liability insurance won’t help a business owner if their employees get hurt on the job. It also won’t help cover repair costs if business property they own gets damaged. Instead, business owners will need workers’ compensation insurance and commercial property insurance, respectively.

Like most other types of insurance, your liability policies don’t cover intentional acts or criminal actions. It’s important to review your insurance policy on a regular basis. You’ll want to make sure you understand the exclusions and limitations of your policy.

Get a Liability Insurance Quote

We’re a property and casualty insurance company with more than 200 years of experience. Whether you need business insurance or personal liability insurance, our specialists can help get you the right type of insurance. Get a liability insurance quote today.