A liability policy, also known as third-party insurance, is a type of insurance that provides financial protection to the insured against claims made by a third party for injury or damage caused by the insured’s actions or negligence. This policy helps cover legal fees and compensation costs arising from lawsuits or claims, protecting the insured from potentially devastating financial burdens.
Key aspects of a liability policy:
- Protection against third-party claims:
Liability policies primarily cover claims made by individuals or entities other than the policyholder, arising from bodily injury, property damage, or other financial losses caused by the insured’s actions or business operations.
- Financial coverage for legal expenses and settlements:
These policies can cover legal fees associated with defending against a lawsuit, as well as the costs of settling a claim or paying a judgment.
- Wide range of applications:
Liability insurance is relevant to various businesses and individuals, including those involved in product manufacturing, construction, professional services, and general business operations that interact with the public.
- Types of liability insurance:
There are various types of liability policies, including public liability, product liability, professional liability, and directors’ and officers’ liability, each tailored to specific risks and industries.
- Importance for businesses:
Liability insurance is crucial for businesses to mitigate the financial impact of potential lawsuits and ensure business continuity.
- Common examples:
A common example is a customer getting injured on business premises due to a hazard like a wet floor, which could lead to a liability claim against the business owner. Another example is a product malfunction causing injury or damage to a customer, leading to a product liability claim.
Liability insurance is designed to offer specific protection against third-party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured.