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What Is Liability Insurance?

Liability insurance provides protection against injuries or damage on a person or property. This insurance is useful to those who are more susceptible to these types of damages since it covers any legal fees or payouts.

By being insured, it is a proactive step in an unfortunate likelihood any impairment could happen. 

How Does Liability Insurance Work?

Commonly interchangeable with third-party insurance, liability insurance covers anyone who is potentially at risk of being sued or found liable for damages. If the insured party is found at fault for property damage or another person’s injury, it would cover those additional expenses.

In short, a liability policy can be extremely helpful for those who are more prone to these types of scenarios. 

What Doesn’t Liability Insurance Cover? 

It is important to note that coverage is only granted to the insured party if they are found unintentionally negligible. This type of insurance does not cover any criminal activities.

Additionally, it will not cover any contractual liabilities or intentional damage. In short, liability insurance provisions only cover damages or injury that is proven to be unintentional. 

Who Needs Liability Insurance? 

The majority of liability insurance is used by vehicle owners since they are vulnerable to unexpected accidents. This insurance would cover any medical bills, automobile damages, and potential legal fees if the insured party was found at fault in a car accident. Commonly, this insurance is required in many states for vehicle owners to have in order to drive. 

High net worth individuals tend to purchase liability insurance, as well, since they are more susceptible to unintentional negligence. For example, business owners tend to have liability insurance in case any employee injures themselves within the business’ premises or operational activities.

Additionally, doctors within the United States require this type of insurance since they are more susceptible to unintentional malpractice. 

It is important to highlight that if the damages caused exceeds one’s liability insurance, one will have to pay out of pocket to cover the remaining expenses. This is why it is important to know what type of damages one is realistically susceptible to and what policies would be able to cover these expenses. 

What Are the Components of Liability Insurance?

For purchasing a motor vehicle certain states require a specific minimum of liability insurance. There are three components of vehicle liability insurance: bodily injury per person, bodily injury per accident, and property damage per accident.

For example, say your insurance only covers $20,000 bodily injury per person, $40,000 bodily injury per accident, and $15,000 in property damage. If you were to get into a car accident with several people, this would be the cap amount the insurance company would pay for the damages. However, say the bodily injury per accident exceeded $40,000, as the driver you would be responsible for the remaining amount. 

For businesses, the type of criteria for liability insurance differs. If a business signs a contract, leases an office, creates products, or has professional licenses, it is highly advised to have liability insurance.

General liability insurance can cover medical expenses, personal or advertising injury, or any damages that are caused to business premises. Additionally, it could cover any reputational harm.

Typically, liability insurance in business is used against third-party bodily injury, third-party property damage, product liability, slander or copyright, and advertising injury. 

Are There Any Liability Insurance Exceptions?

There are a multitude of exceptions but, some of the most common exceptions in liability insurance includes:

  • Expected/Intended Injury: A damage or injury that was intended 
  • Contractual Liability: Assuming the liability of another uninsured party through a contract
  • Workers’ Compensation: Employees are not protected for property damage (however they are covered for bodily injury under workers’ compensation policy)
  • Fellow Employee Injuries: Does not cover if another employee causes an injury to a fellow employee

However there are more exceptions depending on how the liability insurance is used. 

Example of Liability Insurance 

Liability insurance is more ingrained in our society than you may know. For example, have you ever seen a caution wet floor sign at a retail store?

Well this is a part of liability insurance. If a business mops its floor and a customer slips and falls resulting in $100,000 in medical expenses, liability insurance can help cover these costs.

Additionally if the customer sues the business due to the slip and fall incident, liability insurance would also help the business cover these fees. 

Types of Liability Insurance 

As mentioned above, liability insurance can cover various different needs or businesses. There isn’t a one size fits all solution when it comes to this type of insurance, so there are various policies one can purchase that will cover different circumstances.

General Liability Insurance

General liability insurance, which is commonly known as commercial general liability insurance, is typically used within businesses to cover any claims that regard property damage or bodily injury. This covers third-party bodily injury, third-party property damage, reputational harm, and advertising injury.

However, general liability insurance does not cover mistakes made within a business operations or work-related injuries that could be sustainable to employees. For example, if an employee gets sick at work this would more correlate from the workers’ compensation insurance than general liability.

In addition, if an accountant at the business incorrectly documents some business expenses, this is also not covered.  

Professional Liability Insurance (E&O)

Professional liability insurance (also known as errors and omissions insurance) helps cover claims regarding negligence, misrepresentation, and the distribution of inaccurate advice. This type of insurance (E&O) is specialized to protect against losses that are traditionally not covered by other insurance policies.

This type of insurance only covers lawsuit expenses over the financial loss one has endured due to a business’ work or mishap. Moreover, businesses tend to have both E&O and general liability insurance. 

Employer Liability Insurance 

As in the name, this type of insurance is specific to cover claims or costs that are put in by employees. Mainly this insurance covers legal costs or lawsuits that are not covered by workers’ compensation.

For example, it would protect an organization from any employee illnesses, injuries, or deaths. However, it is important to note that this type of insurance does not cover any legal costs from employee lawsuits regarding wrongful termination, discrimination, or sexual harrassment.

For these situations to be additionally included in a business’ insurance policy they would need to have EPLI (employee practices liability insurance).

D&O Liability Insurance (Directors and Officers)

In contrast to employee liability insurance, D&O insurance covers high positioned individuals such as officers or directors. If these individuals were being sued, and had to pay out of pocket for legal fees, D&O liability insurance would reimburse them for those expenses.

To some extent, these claims can also cover criminal or regulatory charges. However, the majority of D&O liability insurances do not cover criminal or fraudulent offenses.

There are three main D&O insurances (side A, B, and C) cover claims from businesses being unable to pay for indemnification to entity coverage. 

What to Consider With Liability Insurance 

With many options to choose from, knowing what liability insurance to choose from may be difficult. Here we will help guide you so you can make the best decision for yourself or your company. 

The Type of Business 

Depending on your business’ industry, your liability insurance may differ and fluctuate in price. Typically, liability insurance companies will look at trends within your specific industry. They look to see what your competitors have paid and determine a reasonable amount of coverage in case of unforeseen events. 

The Business’ Location

Depending on the location, laws and regulations may make the insurance more or less expensive. Components that go into an expensive liability insurance can be due to high crime rates, political standing of the region’s courts, or susceptibility to natural disasters or storms.  

Liability Insurance Vs. Full Coverage Insurance

In regards to car insurance, full coverage covers both your liability and property damage done to your vehicle. This type of insurance covers collision insurance and comprehensive insurance.

It disregards the fault of the accident but rather considers the damage of the vehicle or bodily injury. Due to this, full coverage insurance tends to be more expensive than if you were to purchase just liability insurance. 

Why You Should Have Liability Insurance

Unfortunate, unexpected events happen in life and as the saying goes it is better to be safe than sorry. Without liability insurance, a car accident or a claim against your business could potentially cost you thousands of dollars.

Being insured can be a proactive step to lessen the burden of an unfortunate event. Having a financial advisor can help guide you through what liability insurance policy would best suit your financial needs.

Learn more about getting a financial advisor here.