What Is Liability Insurance and How Does It Work?

April 18, 2023
A bookstore owner consider general liability insurance while she works.

Accidents happen, but if you or your business is to blame, you could be found liable for resulting third-party losses, including medical and legal bills. Liability insurance, or third-party insurance, is a risk management solution that helps protect insureds from the costs from lawsuits or damages claims asserted by individuals against you or your business. This type of insurance covers judgments (or payouts) if a judge finds you liable for damages. However, contractual liabilities, intentional acts, criminal prosecution and certain other losses are not generally covered.


What Is Liability Insurance and What Are Its Goals?

When it comes to the question of what liability insurance is, many would recommend it as a crucial insurance policy. In fact, if you work in a profession prone to lawsuits, some states require you to maintain certain types of liability insurance.


What Are Liabilities?

Generally speaking, liabilities are legally binding obligations payable to other entities (i.e., third parties). Professionals who have a higher likelihood of facing liability lawsuits include:

  • Lawyers
  • Engineers
  • Doctors
  • Accountants
  • Entrepreneurs
  • Drivers

The concept of liability comes from the idea that you have responsibilities to others, whether you are a homeowner or a working professional. For instance, doctors have an obligation to care for a patient by meeting a certain standard of care, and not act negligently or carelessly. If a doctor acts negligently and a patient is hospitalized longer, for example, the doctor may be liable for the medical costs from the extended hospitalization.


What Are Liability Coverage Examples?

Once you can answer "What are liabilities?" you can better understand the types of injuries liability insurance will typically cover. Liability insurance coverage can be for bodily injury and property damage. For an example of the former, say that you have a guest in your home and while walking up to your door, he or she slips on ice and breaks an arm.


Property damage, on the other hand, refers to a loss to third-party property. For example, imagine your children visit a neighbor's property to play baseball but accidentally throw the ball through your neighbor's window.


What Is Liability Insurance Able To Cover?

Two types of liability coverage for bodily injury and property damage are generally available: personal insurance and commercial insurance. In general, personal liability insurance covers claims against individuals for damages to people or property, while business liability insurance protects businesses against claims and losses due to defects, recalls, and accidents, among other things.


Personal liability insurance options can include:

  • Personal liability: Coverage for medical bills if someone gets hurt on your property or damages to another person's property
  • Bodily injury liability insurance: Coverage to pay for medical bills in a car accident you cause
  • Umbrella insurance: Additional limits and coverage above your auto and homeowners liability insurance limits

Business liability insurance, on the other hand, can include:

  • Professional liability: Also called errors and omissions insurance, this is typically coverage for legal costs if a customer or client files a lawsuit against a business that provides a professional service
  • Commercial umbrella insurance: Coverage for costs that exceed a business’s underlying liability insurance limits
  • Data breach insurance: Coverage for damages caused to third parties when personal information is stolen from a business
  • Commercial auto insurance: Protection for third-party losses caused by employees who drive for a business

Coverage options will depend on your individual policies and needs. For instance, when you purchase auto insurance, you may decide between liability insurance only and full coverage. The difference is that liability only covers injuries and damages to another person, whereas full coverage includes liability, collision and comprehensive insurance.


Who Needs Liability Insurance and How Much Does It Cost?

Business owners are sometimes required to have commercial insurance. Check your state's laws and business’s agreements to determine the type of business insurance coverage you may need. Commercial liability insurance costs vary depending on your business and location. If you have a higher risk, you will have higher costs.


Think about the scope of your business before you choose a coverage limit(s). Higher limits are more expensive, so choose a policy that makes financial sense and takes into account your level of risk. Consider the types of claims you could face in your industry and determine the likelihood of different claim costs. Insurers can offer tailored policies that help keep your premiums down.


Does My Business Need Liability Insurance?

Now you can answer "What is liability insurance coverage?" but are you still unsure if you need it? If you own a business, it might be required for you to maintain liability insurance. You can try to run your business perfectly, but you can't ignore the reality that mistakes can and do happen. For instance, if a CPA overestimates his or her client’s budgets and the client takes the advice and spends too much money, the CPA could be liable for damages.


Acrisure can lead you ahead of the evolving risk landscape by evaluating your company’s insurance needs to help develop the right business insurance and risk management solutions for you. Are you ready to get started toward becoming insured? Contact us today to request a quote.

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