Liability insurance: Overview, definition, and example
What is liability insurance?
Liability insurance is a type of insurance policy that provides financial protection to individuals or businesses against claims for damages or injuries caused to third parties. It covers legal costs, settlements, and judgments arising from incidents where the insured is found legally responsible. Common types of liability insurance include general liability, professional liability (errors and omissions), and product liability insurance.
For example, a contractor may purchase general liability insurance to cover claims related to property damage or injuries caused while working on a construction site.
Why is liability insurance important?
Liability insurance is important because it protects businesses and individuals from significant financial losses resulting from lawsuits or claims. It ensures that they can meet their legal and financial obligations without jeopardizing their operations or personal assets.
For businesses, liability insurance is often required by law or contract, such as when entering into vendor agreements or obtaining licenses. It also demonstrates responsibility and builds trust with clients, partners, and stakeholders.
Understanding liability insurance through an example
Imagine a restaurant owner purchases general liability insurance. If a customer slips and falls on the premises and files a lawsuit, the insurance policy covers the medical expenses, legal fees, and any settlement or judgment, reducing the financial burden on the owner.
In another example, a software development firm obtains professional liability insurance. If a client claims the firm’s software caused a significant business disruption, the policy covers legal defense costs and any resulting damages awarded to the client.
An example of a liability insurance clause
Here’s how a liability insurance clause might appear in an agreement:
“The Contractor shall maintain general liability insurance with a minimum coverage amount of $[Insert Amount] per occurrence and $[Insert Amount] in aggregate. A certificate of insurance shall be provided to the Client upon request, naming the Client as an additional insured.”
Conclusion
Liability insurance provides essential financial protection against claims for damages or injuries caused to third parties. It safeguards businesses and individuals from the potentially devastating costs of lawsuits, ensuring continuity and stability.
By obtaining liability insurance and including related provisions in agreements, businesses can reduce risks, comply with legal requirements, and foster trust with clients and partners.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.