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Definition of Legal Liability in Business Insurance

Commercial insurance terms and definitions. Learn more about business insurance terminology and get the right coverage for your business.

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Legal Liability

Legal liability covers two factors when it comes to business insurance. First, it puts the onus of payout on a company when property is damaged or someone is injured. Second, it makes the party legally responsible for the damage or injury, even if it wasn’t something they purposely did.

How Legal Liability Affects Small Businesses

Legal liability is most consequential within the small business world. In short, liability means a company is held legally accountable for harming another party. This can be through physical damage or injury. Additionally, it relates to financial or mental harm.

The result of such liability isn’t jail time. Since these legal actions take place in a civil court, a liable small business would be deemed the tortfeasor — the party found responsible — and be subjected to fines and other payouts.

Let’s say someone slips on the ice in front of a small business’ office. Regardless if they were a customer or not, the injured party can sue the company for damages. In turn, the court can find that the small business was legally liable for the injury because its managers didn’t clear the area in front of their storefront.


When a party is deemed legally liable and has to make retribution, they utilize their insurance to complete the payouts. For the plaintiff, this might be in the form of reimbursement for bills and other items related to the issue. For the business, liability insurance covers payment of legal fees to lawyers and the courts.

The insurance forms a small business would use to assist in payments include:

  • General liability insurance for customer injuries and damage

  • Errors and omissions (E&O) insurance to cover those in the company who provide professional advice to customers

  • Workers’ compensation insurance to cover liabilities when an employee is injured or dies

  • Employment practices liability insurance to cover when an employee sues due to wrongful termination or harassment

Criminal vs. Civil Legal Liability

Legal liability falls under both criminal and civil laws. However, they have different connotations. In civil law, the defendant isn’t sent to jail. Instead, they are deemed liable even if they had no intention of harm.

Conversely, legal liability under criminal law might lead to arrests or jail terms. For example, back in 2009, a Volkswagen executive was arrested due to his major conspiratorial role within the company. He helped to keep U.S. regulators from discovering the company’s diesel vehicles were programmed to cheat on emissions tests.

Overall, a legal liability case reaches criminal courts if two things can be determined. First, the plaintiff and their attorneys must prove that the other party was responsible for the circumstances. Second, they willfully knew what they did could harm property or humans.

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