Liability Insurance: What does it cover?

What is Liability Insurance?


Liability insurance is a type of insurance that shields an insured party against lawsuits brought about by injury to third parties and property damage. Any legal fees and payouts that an insured party is accountable for, if they are held legally liable, are covered by liability insurance policies. However, deliberate harm or contractual obligations are not covered by liability insurance.

In contrast to other types of insurance, liability insurance policies pay out benefits to third parties rather than policyholders.

How Does Liability Insurance Work?

Liability insurance is crucial for people who are accountable and at fault for harm done to others, or if the insured party destroys someone else’s property. Liability insurance is hence sometimes known as third-party insurance.

Anyone who runs a business, operates a vehicle, practices medicine, or is an attorney—in other words, anyone who could be sued for injuries and/or property damage—should purchase liability insurance. Such policies should cover both the insured and any third parties who may sustain injuries due to the policyholder’s negligent behavior.

For instance, the majority of states mandate that car owners have liability coverage under their auto insurance plans to pay for damage to other people’s property and bodily injuries in the event of accidents. If a product is defective and causes harm to customers or other third parties, the manufacturer may be covered by product liability insurance. For protection, if an employee is hurt while doing business, business owners might acquire liability insurance. Liability insurance coverage is necessary because of the decisions that surgeons and medical professionals make on the job.

It’s a good idea to review each of your liability insurance products to make sure you understand how they operate. Exclusions in policies may detail the categories of losses that they do not cover.

The minimum liability insurance requirements for auto insurance coverage may exist in your state. Depending on your state, you may be required to carry a minimum amount of insurance for: 

  • Liability for bodily harm 
  • Liability for property damage

Several factors may affect your coverage requirements for various types of liability insurance. Among them are: 

  • Your claims background 
  • Where you are located 
  • What kind of business you operate  
  • The age of the company

Liability insurance aids in defending against third-party claims of property loss or bodily harm. These contracts exclude the policyholder from coverage. Consider this:

  • If you are harmed in a car accident that you caused, bodily injury liability coverage won’t assist in paying your medical fees. Personal injury protection (PIP), sometimes referred to as no-fault insurance, would therefore be required. 
  • If you cause property damage in an accident, your property damage liability insurance won’t help you pay for the repairs to your car. With this kind of claim, collision coverage could assist you.
  • A business owner’s general liability insurance wouldn’t protect them if one of their employees was injured while on the job. Additionally, if they damage any of their commercial property, it won’t assist pay for repairs. Instead, they would require, respectively, workers’ compensation insurance and commercial property insurance.

Your liability coverage does not cover intentional acts or criminal behavior, like the majority of other insurance types. Regularly reviewing your insurance policy is crucial. Make sure you are familiar with the policy’s exclusions and restrictions.

Types of Liability Covers

Owners of businesses can be liable for a variety of events, any of which could result in a significant liability claim. Every business owner must have an asset protection strategy in place that is based on the availability of liability insurance.

The most common forms of liability insurance are as follows:

  • Employers are required to have employer’s liability and workers’ compensation insurance to safeguard their companies from claims resulting from employee accidents or fatalities
  • Businesses that produce goods for the general market must carry product liability insurance. Product liability insurance shields companies from litigation brought about by injuries or fatalities brought on by their products
  • A company is protected by indemnity insurance from negligence claims stemming from monetary loss brought on by errors or failures to perform
  • Directors and executives of a corporation are shielded from liability if  the firm is sued. Although most firms provide some level of personal safety for their employees, some corporations also provide additional protection for their management team
  • Products for personal liability insurance known as umbrella policies are designed to protect against severe losses. Coverage frequently starts when the liability limits of other insurance are reached
  • A typical commercial general liability  policy, commonly referred to as comprehensive general liability insurance, covers commercial liability. It offers insurance coverage for lawsuits resulting from harm to workers and the general public, property damage caused by an employee, as well as injuries sustained as a result of employees’ negligence. Infringement of intellectual property, slander, libel, contractual obligation, tenant liability, and employment practices liability may also be covered by the policy
  • Any small or large firm, partnership or joint venture, corporation or association, organization, or even recently acquired business might benefit from customized comprehensive general liability plans. Bodily injury, property damage, personal and advertising injury, medical costs, and operations and premises liability are all covered under insurance. Insurance companies cover general and compensatory damages in court cases but not punitive damages

What Does Liability Insurance Cover?

There are two types of liability insurance: bodily harm liability coverage and property damage liability coverage. They are divided as follows:

  • Liability insurance for bodily harm (sometimes abbreviated as “BI”)

If you are judged to be at blame for an accident, bodily injury compensation might help with the medical bills of the injured party. If you are sued, it might also assist with legal expenses

  • Liability insurance for property damage (sometimes abbreviated as “PD”)

If you damage someone else’s property, this coverage assists with the cost of repairs. For instance, if you rear-end another car, it may help cover the costs of the auto shop so that you are not responsible for the entire cost of repairs

Liability Insurance Coverage Limits

The coverage limits you select will determine how much your insurer will pay for a claim under your liability insurance. Drivers are required to acquire minimum limits of bodily injury liability and property damage liability coverage, but you are free to purchase more. On your auto insurance policy, you can notice one of three liability coverage limits:

  • Limitation of liability for property damage. 

This is the highest repair cost your insurance company will cover for the harm you cause to someone else’s property. The maximum payout would not go over what you’ve allocated

  • Limit each person’s liability for bodily harm. 

This is the maximum compensation that will be given to each victim of an accident that you cause

  • Limit bodily injury liability for each accident. 

This is the total amount that your insurance will cover for all medical costs associated with a single accident where you are at fault. Setting this limit at a level that is comfortable for you is crucial since it can be required to assist cover the medical costs of several people

Most insurance companies combine the limitations for property damage and physical injuries. Your policy might, for instance, be something like this: 

  • 25/50/10 ($25,000 bodily injury per person, $50,000 per accident, $10,000 in property damage) 

or 

  • 100/300/50 ($100,000 bodily injury per person, $300,000 per accident, $50,000 in property damage) 

The packages your insurer provides determine your coverage limits. In other words, you might not be able to select specific limitations for your property damage or bodily injury coverage.

How Much Does Liability Coverage Cost, and How Much Should You Buy?

How much coverage you buy affects how much liability insurance will pay for, among other things. The more liability insurance costs, the larger your coverage maximum should be. If you change your limit, your insurance provider can let you know how much your policy will cost. 

Any expenses that are greater than the liability coverage limits would be your responsibility to cover. As a result, it would be wise to raise your auto liability limits above the state’s bare minimums.

What Does Liability Insurance Not Cover?

The expense of fixing damage to your  car after an accident is typically not covered by liability insurance; however, collision insurance can cover it. Repairing damage brought on by additional sources, such as hail, also doesn’t pay; here is where complete coverage comes in. 

Liability insurance does assist in covering the medical expenses of someone you hurt, but it does not cover your injuries. Consequently, depending on the state you live in, you might want to think about purchasing personal injury protection or medical expenses coverage.

Special Considerations

High-net-worth individuals (HNWIs), or those with significant assets, are more likely to obtain personal liability insurance policies, but anyone whose net worth exceeds the combined coverage limits of other personal insurance policies, such as home and auto coverage, is advised to do so. Even while most carriers provide discounted rates for coverage bundles, the expense of an additional insurance policy isn’t appealing to everyone. Personal liability insurance is regarded as a supplementary policy, and policyholders may be required to carry specific limits on their home and auto policies, which could lead to additional costs.

Although commercial general liability insurance offers protection from the majority of legal hiccups, it does not shield the insured against mistakes and omissions, or shield directors and officers from lawsuits. For these situations, businesses need certain regulations, including:

  • Errors and Omissions Liability Insurance (E&O): An Errors and Omissions Liability insurance policy protects against legal actions brought about by the provision of professional services that are careless, or by the failure to carry out professional obligations. Any company that offers a service to a client for a price, including attorneys, accountants, architects, and engineers, should acquire this type of insurance. Criminal prosecution, dishonest or fraudulent behavior, as well as bodily injury claims, are not covered by an E&O coverage. Attorney fees, court costs, and any settlements up to the amount stated by the insurance policy are, nevertheless, paid for by the insured.
  • Directors and Officers (D&O) Insurance: This type of policy guards directors and officers of large corporations from financial losses and fines resulting from illegal actions, poor investment choices, neglect of property, disclosure of private information, hiring and firing decisions, conflicts of interest, gross carelessness, and other mistakes. Most D&O plans don’t cover fraud or other illegal activities. The company, its location, industry, and loss history all affect premiums.

What is Backdated Liability Cover?

Usually, if an incident occurs that generates a claim, you need to have liability insurance. However, backdated liability insurance is insurance that offers protection for a claim that came about before the insurance policy was bought. These insurance policies are uncommon and typically only offered to corporations.
Our specialists can help you whether you’re seeking company insurance or personal liability insurance. Get an estimate on liability insurance right now.

Rehan Saleem

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