Liability Insurance 101

Written by Aaron Adam

Liability insurance is a form of insurance coverage that offers coverage of claims made by a third party that may arise from the insured's action or inaction. It offers no coverage for any losses experienced by the insured, which must be covered separately, but instead exists only to protect third parties.

Public policy dictates that some personal and business activities that run a risk of being harmful to others through the potential negligence of a person or company should be insured to reduce the likelihood of long term uncompensated harm to members of the public. There's a wide variety of personal and business liability insurance available, such as D & O liability, general liability, professional liability insurance, employer liability and automobile insurance liability.

In general, liability insurance falls into three categories, public liability, product liability and employer liability.

Public liability

Public liability insurance, in general, provides coverage for claims from the general public that may arise from certain risk-laden activities undertaken by individuals or businesses.

Perhaps one of the most well-known types of liability insurance is automobile liability coverage. This form of liability insurance provides coverage for claims filed by people whose property may be damaged by the actions of the insured. While the insured driver won't be compensated for any damage to his or her vehicle, the owner of another vehicle or of a building or other property damaged by an accident that's determined to be the fault of the insured driver will be compensated.

Businesses usually purchase general liability policies to cover claims that may be filed as a result of injuries that may occur in the course of their business. For example, most restaurants and bars are required to purchase general liability policies that offer coverage for claims that may arise because of fires, or fights, etc.

E&O policies also fall under the umbrella of public liability. These policies indemnify insureds from claims that the negligence of employees or officers of a company caused injury or harm to a plaintiff.

The purchase of insurance to cover public liability isn't just good for the public, it's also good for businesses, because the costs of defending liability lawsuits and paying potential claims out of pocket is enough to shut down most small businesses and even some larger businesses.

Product liability

Product liability insurance generally isn't required by law, but most manufacturers who make products bought and used by a broad section of the general public would be wise to purchase such a policy. Product liability insurance indemnifies manufacturers from claims of injury by consumers who bought products from the insured and claim that they were injured as a result of the manufacturers negligence in making or selling the product.

Although it's not compulsory in many states, most large-scale manufacturers choose to carry the insurance because of the business-killing potential of a big product liability suit.

Employer liability

Employer liability coverage protects employers from claims that company negligence or wrongdoing caused injury to their employees. Most states require companies to at least carry workers compensation policies that will provide coverage for employees who are hurt on the job. More substantive policies may be carried by employers to cover other liability claims.

Legal issues

When a liability claim is made, the insurer has the right to defend that claim in court, attempting to prove that the alleged loss being made by the third party was not caused by the third party. Policy limits tend not to apply to the cost of covering such suits, which can be quite lengthy and expensive. In some cases, if the insured is found to be liable for the claim, the insurer may try to deny coverage if the activity causing the claim lays outside the scope of coverage, or if the insured engaged in activity that might put the claim outside the scope of coverage offered by the liability policy.

The Internet age has given rise to new questions regarding liability insurance and its application to intangible but extremely valuable information and data. Legal questions about the definitions of liability with regard to system failure, protection of data and and claims of non-performance by technological companies have caused insurers to write policies with more care and potential insureds to shop a little more carefully when buying liability insurance.