Definition of Liability Insurance in Business Insurance

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Liability Insurance

There are several types of insurance policies. One of the most critical is the section that protects an individual or group if they are sued due to injury or damage to property. This is known as liability insurance.

What Does Liability Insurance Cover?

Normally part of a general policy, liability insurance protects a policyholder from the risks incurred from another party claiming they were responsible for bodily or property damage. In general, it covers costs related to medical treatments, payouts, or charges related to legal assistance. Without liability coverage, parties would be subject to payment of these upfront costs.

How It Works

The liability portion of a policy goes into effect when a claim is filed by another party. This can be an individual, an opposing insurance company, or another third-party organization. Once the claim is accepted, the insurer investigates the circumstances behind it to determine if they are valid.

If they agree that the claims are correct and fall within their liability coverage, the insurance company will commence a payout to the party. If they feel the claim is not valid, they’ll reject it. Sometimes, there will be a combination of acceptance and denial.

Liability insurance is not only used to pay another person or group for damages. Its primary goal is to help the policyholder cover costs related to injury, hospitalization, or the repair of damages. This is the reason the insured pays a regular premium — it maintains the liability coverage.

Where Liability Coverage Is Found

For individuals, liability coverage is normally found in auto insurance policies. These cover compensation for damage to the insured’s vehicle or property as well as costs related to injuries. Should a third-party file a claim due to one of these factors, the insurance firm will pay out their liability as well.

In addition to this example, liability insurance is a necessity for business owners or medical professionals. In other words, any person or organization that is susceptible to lawsuits for damages or injuries.

Those who are recommended to purchase liability coverage include people who are considered high-net-worth individuals (HNWIs). For example, Bill Gates might need liability coverage due to his large amount of assets. Though he’s no longer part of Microsoft’s day-to-day operations, an individual or group could sue him for damages.

Types of Liability Insurance

  • Workers’ compensation

  • Product liability insurance

  • Auto insurance — particularly the sections related to injuries, repairs, and property damage

  • Umbrella liability — protects companies from complete losses of property or other assets


Most of the time, liability coverage is part of a comprehensive insurance policy. However, there are situations where it needs to be purchased separately. The situation above involving HNWIs is one such example.

A second instance where separate coverage is required relates to the daily operations of a corporation’s director and senior officers. These people must purchase director and officer (D&O) insurance to shield them from legal costs.

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