Legal Liability

Updated on March 26, 2024
Article byRutan Bhattacharyya
Edited byRutan Bhattacharyya
Reviewed byDheeraj Vaidya, CFA, FRM

Legal liability is the responsibility a business owner must take according to law for losses or injuries they inflict upon any other person. Efficiently comprehending and fulfilling this obligation is essential for businesses to carry out operations ethically while steering clear of legal consequences.

Legal Liability

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When organizations become responsible for financially harming any other party or causing injury, the judgment can lead to penalties, fines, or any other form of payment. Depending on the extent or seriousness of the loss, such payments can outstrip the ability of any entrepreneur or business owner to make payment. Thus, it can potentially trigger bankruptcy.

Key Takeaways

  • Legal liability refers to the liability that arises when a business is responsible for the damages or financial harm caused to another party, for example, its customer. Fulfilling such a legal obligation is crucial for businesses to operate without any disruption and achieve success over the long term.
  • This liability can be of three types — tort, statutory, and contractual.
  • There are different types of insurance plans offering legal liability protection to organizations. Some of them are commercial auto, worker’s compensation, errors and omission, and general liability insurance.

Legal liability refers to a type of liability that arises when a business becomes legally responsible for causing losses to another organization or individual. If a business has such a legal obligation, it needs to cover the expenses incurred to address specific injuries or damages. Note that these liabilities may result from intentional acts, unintentional acts, and contracts.

Typically, the legal obligations deal with civil wrongs instead of criminal wrongs. Businesses must understand all the laws related to consumer rights, employment, etc. This is because liabilities can arise if businesses fail to adhere to the laws covering such areas.

As noted above, if an organization is unable to fulfill such a liability, it has to deal with certain consequences, which may include lawsuits, penalties, and more. Also, individuals must keep in mind that if a business can fulfill all its legal obligations, it can protect its stakeholders and ensure adherence to different rules and regulations.

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Types

Let us look at the different types of legal liability in business.

  • Contractual Liability: Contractual liability refers to the liability an organization assumes when the business owner puts their signature on a contract involving another party. Simply put, one party transfers the full or a portion of the overall liability to the other party through a contractual agreement.
  • Tort Liability: Tort liability arises when an entity causes damage or harms another party. In this case, a company or person called the tortfeasor violates another party’s rights. There are various types of tort liability, for example, tort of negligence, strict liability, vicarious liability, and intentional torts.
  • Statutory Liability: This refers to a legal term that describes a liability that comes into existence when a business becomes responsible or accountable for a certain action because of any related law. Also, note that such a law is not open to anyone for interpretation. It can be of various types, like media, employee benefits, vehicles, and professional liability.

Examples

Let us look at a few legal liability examples to understand the concept better.

Example #1

Suppose Company ABC is an automobile manufacturing company that has a large number of workers engaging in the production process. One of the machines used in manufacturing the tires was in poor condition owing to a lack of maintenance. When using it, some of the workers got injured and had to be hospitalized. The workers filed a lawsuit against the owner of the organization, seeking compensation.

 Since ABC already had workers’ compensation insurance, it could easily compensate the workers without dealing with financial stress. However, the news had a negative impact on the organization’s reputation.

Example #2

In May 2023, the Supreme Court in the United States declined to address the legal liability shield safeguarding tech giants like Google and Meta from being held responsible for what users post on their social media platforms.

Although this provided a breather to the companies, Congress members still aim to reform the shield. Various lawmakers view Section 230 as protection that is unnecessary for such a huge industry. That said, the proponents believe that it safeguards the smaller names in the industry, helping them steer clear of expensive lawsuits that may result from what their users say.

Coverages

Companies can get legal liability protection or coverage via different insurance policies. The following coverages enable businesses to handle financial consequences that may result from lawsuits and legal claims:

  • Errors And Omission Insurance: Such an insurance plan can offer protection to businesses if they make any mistake or fail to meet a certain deadline that affects their client. People also call such policies professional liability insurance.
  • Commercial Auto Insurance: It offers coverage when any driver appointed by an organization causes damage or injury to another party.
  • Workers’ Compensation Insurance: This type of coverage provides businesses an added layer of financial protection if an injury takes place to an employee. Moreover, provides financial compensation for the legal expenses if any employee or worker files a lawsuit against the business owner because of any work-related injury.
  • General Liability Insurance: This kind of insurance plan protects businesses from the cost that may arise in the case of injuries to any customer or any damage to customers’ property.
  • Business Owner’s Insurance Policy: It provides general liability insurance besides offering coverage for damages to business property.

The concepts of direct primary, public liability, and legal liability in business can be confusing for individuals unfamiliar with them. That said, they can steer clear of potential confusion if they know the key differences in the table below:

Legal LiabilityDirect PrimaryPublic Liability
Legal liability in business arises when a business is at fault for causing damage, injury, or losses to an individual or another business. Direct primary offers financial protection to a business in case of damage to its customer, irrespective of which party is liable.    This kind of liability arises when a general public member is harmed due to a business’s product or actions. It is a part of legal liability. 
It is a kind of liability. Direct primary is an insurance coverageUnlike the direct primary concept, it is the liability that a business needs to fulfill.  

Frequently Asked Questions (FAQs)

1. What is the legal liability of negligence?

This kind of liability arises when a business is negligent in causing losses or any form of damage to the other party. Simply put, such liabilities occur due to thoughtless or careless conduct. Moreover, it can materialize if an organization takes too long to act.

2. What are the legal liability issues of a business plan?

Initially, the categories in which liability and legal risks any operation carried out by a business can fall into are as follows: 
– Employee safety 
– Product liability 
– Successional risk 
– Environmental risks 
– Contractual risks 
– Public safety

3. How can you avoid legal liabilities?

Business owners or entrepreneurs can steer clear of or minimize legal liabilities by ensuring to follow all rules and regulations imposed by the government. Moreover, they must also keep accurate records securely. Such records can be utilized in defense when a company is accused of carrying out any illegal activity.

This article has been a guide to Legal Liability and its definition. We explain its examples, types, coverages, and comparison with public liability & direct primary. You may also find some useful articles here –

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