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Liability Insurance

Updated on January 5, 2024
Article byRutan Bhattacharyya
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Liability Insurance Meaning

Liability insurance is an insurance policy that provides coverage for the cost of losses the insured causes to another party or their property. Such policies cover the legal costs, medical bills, and other expenses the insured is liable to pay for the damages.

Liability Insurance

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This type of insurance protects the insured from the cost of legal liability and lawsuits that might arise due to their unintentional fault or negligence. Unlike other insurance policies, third-party liability insurance plans pay third parties, not the insured. Third-party insurance policies are of three types — business, personal, and auto.

Key Takeaways

  • Liability insurance refers to insurance products specifically designed to financially protect the insured if they are found legally responsible for injuring a person or damaging someone else’s property.
  • Most states in the U.S. require vehicle owners to have a liability car insurance policy with a minimum coverage limit.
  • Third-party insurance policies do not provide coverage for intentional damages and criminal acts.
  • Personal, auto and business are the three main types of third-party insurance policies that an individual can choose to purchase for an added layer of financial protection.

Liability Insurance Explained

Liability insurance is essential for individuals who are at fault for causing injuries to another person or unintentionally damaging someone else’s property. These policies offer the insured protection against the claims resulting from such damages and injuries.

Anyone driving a vehicle, practicing a profession, or running a business can purchase a third-party insurance policy. In other words, individuals who can be legally responsible for paying for damages or injuries resulting from their unintentional fault can opt for such insurance. However, these policies do not cover losses arising from intentional or criminal acts, even if the policyholder is legally responsible for the damages.

In some cases, third-party insurance is mandatory. For example, most states in the United States require vehicle owners to purchase a third-party insurance policy with a minimum coverage amount. This protects the insured and the third party in case of an accident.

Types

Although the concept of third-party insurance is the same for different insurance policies, the coverage details can vary. So, let us look at the different types of third-party insurance.

#1 – Personal Liability Insurance

This offers coverage for the legal liability which may arise if the insured, their family member, or their pet injures another individual or damages their property. Thus, it prevents the insured from paying a substantial amount if they are found liable for causing any damage to the third party. This coverage is a component of a homeowners insurance policy or an umbrella insurance plan.

#2 – Liability Car Insurance

It is specific to accidents the insured might cause while driving a vehicle. It provides financial protection to the insured if they are found legally responsible for causing any damage to another person or their property with their vehicle. Note that the insured will be eligible for coverage if someone else is responsible for an accident while driving the former’s vehicle.

#3 – Business Liability Insurance

This insurance policy safeguards business entities by covering the cost of legal liability resulting from injuries or property damage caused by the organization’s negligence. Liability insurance for businesses is of different types. For example, the coverage pays for accidental damage to a company’s customer’s property, customer injuries at the business entity’s stores, facilities, or properties, harm caused due to misleading advertising, etc.

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Coverage Of Liability Insurance

Let us look at the coverage details of different third-party insurance policies.

#1 – Personal Liability Insurance

This type of third-party insurance policy covers the following:

  • Medical bills resulting from the visitor’s injury at the insured’s home.
  • Injuries to the visitor or any damage to their property caused by the insured’s pet.
  • Property damage is caused by the insured or their family outside their property.
  • Legal expenses arising due to lawsuits seeking compensation against damages covered by the third-party insurance policy.

The following are some of the common exclusions:

  • Liability resulting from injuries or property damage caused by intentional or criminal acts.
  • Liability arising due to a vehicle accident.
  • Medical bills for injuries sustained by insured or their family members.

Moreover, these policies do not offer coverage for injuries or damages resulting from the insured’s business or profession-related activities.

#2 – Liability Car Insurance

Liability car insurance policies cover the following:

  • Bodily Injury Liability – If the insured hits an individual with their car while driving, this coverage will pay for the medical costs incurred by the latter. The policy covers the funeral expenses, too, if applicable.
  • Property Damage Liability – It covers the expenses incurred for repairing an individual’s property if an insured damages it with their vehicle.

When looking at liability car insurance policies, one can find the coverage limits set apart using a forward slash.

Let us look at this example to understand the concept better:

In California, the minimum third-party insurance requirement for vehicle owners is 15/30/5. This includes $15,000 and $30,000 for injuring one person and multiple persons, respectively, and, lastly, $5,000 for property damage. The first two liability categories also include coverage for losses in the case of death. 

Various insurance providers are offering combined single limit or CSL policies. Under such an insurance plan, the insured’s liability limit is a single amount, for example, $200,000, contrary to a single amount per liability category.

A liability car insurance policy does not cover the following:

  • Damages to the insured’s vehicle.
  • Injury-related expenses are borne by the insured or their passengers after an accident.

Moreover, third-party auto insurance does not provide coverage for expenses that exceed the insurance policy’s coverage limit.

#3 – Business Liability Insurance

Different types of policies under this category cover financial losses from business-related activities. Let us look at them in detail.

  • Errors and Omissions InsuranceErrors and omissions insurance policies safeguard businesses from liability costs arising from professional negligence.
  • General Liability Insurance – This type of insurance covers losses if a person files a liability claim against a business for misleading advertising, bodily injuries, and damages caused due to slander.
  • Public Liability Insurance – The public liability insurance covers damage or loss of property, bodily injuries, and death on a business’s property.

Third-party business insurance policies do not cover the following:

  • Damage to business property
  • Lawsuits filed for employee discrimination
  • Damage to vehicles operated by the business
  • Employee injuries

Frequently Asked Questions (FAQs)

How much is public liability insurance?

One can expect to pay around $500 annually towards a public liability insurance policy for a well-established business with large-scale operations. The amount could be anywhere between $60 and $170 per month for small businesses. That said, individuals should note that this is a rough estimate.

How much liability insurance do I need?

Generally, individuals want sufficient third-party insurance to cover their net worth. Note that net worth equals the sum of cash and asset values minus their debt.

Does liability insurance cover hit and run?

This policy won’t pay for the damages to the insured’s car due to a hit and run; it covers the cost of repairing the other individual’s car if the insured is at fault in an accident. Moreover, it pays for the medical bills resulting from the accident.

How much is general liability insurance?

The cost of these policies can vary based on various factors, for example, the coverage limit. Therefore one can contact different insurance providers and get a quote.

This article has been a guide to Liability Insurance and its definition. Here, we explain car, public, and business liability insurance, its types, and coverage. You can learn more from the following articles –

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