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Liability insurance provides the insured party with protection against claims resulting from injuries and damage to people or property. Liability insurance policies cover both legal costs and any payouts for which the insured party would be responsible if found legally liable. Intentional damage and contractual liabilities are generally not covered in these types of policies.
Liability insurance is critical for those who may be held liable for injuries to others, or in the event that the insured party damages someone else's property and is considered to be at fault. Liability insurance policies are taken out by anyone who owns a business, drives a car, practices medicine or law—basically anyone who can be sued for damages and/or injuries.
A product manufacturer may purchase product liability insurance to cover them if a product is faulty and causes damage to the purchasers or any other third party. Business owners may purchase liability insurance that covers them if an employee is injured during business operations. The decisions doctors and surgeons make while on the job also require liability insurance policies. And when it comes to auto insurance, 49 out of the 50 states as well as D.C. all require drivers to have some form of liability insurance coverage in case of an accident or injury.
According to the 2017 data from the Insurance Information Institute, the United States is the largest market for commercial liability insurance. There were $86.6 billion in liability claims written across the country in 2014, followed by $10.6 billion in the United Kingdom. The global liability insurance market has seen a lot of movement in the last two decades. Statista reported the market hit a total of $3.3 billion USD in 2017—the highest it's been since 1994.
Business owners are exposed to a range of liabilities, any of which can subject their assets to substantial claims. All business owners need to have an asset protection plan in place that's built around available liability insurance coverage.
Here are the main types of liability insurance:
The comprehensive policy provides compensation for defending or investigating a lawsuit, court costs including attorneys' fees, police report costs and witness fees, any judgment or settlement resulting from the lawsuit, medical expenses for the injured persons, etc. Insurers retain the right to defend any suit against the insured company arising from bodily or property damages.
Commercial general liability insurance protects against most legal hassles, but it won't protect directors and officers from being sued, and it won't protect the insured against errors and omissions. Companies require special policies for these cases. Below, are lesser-known liability insurance policies worth considering for special professional coverage.
Errors and omissions liability insurance (E&O) offers coverage for lawsuits arising from rendering negligent professional services or failing to perform professional duties. Lawyers, accountants, architects, engineers, or any business providing a service to a client for a fee should purchase this form of insurance.
This kind of policy does not cover criminal prosecution, acts deemed to be fraudulent or dishonest, or any claim against bodily injury. The insured, however, is covered for attorney fees, court costs, and any settlements up to the amount specified by the insurance contract.
Directors and officers (D&O) insurance provide protection to directors and officers of large companies against legal judgments and costs arising from unlawful acts, erroneous investment decisions, failure to maintain the property, releasing confidential information, hiring and firing decisions, conflicts of interest, gross negligence, and other errors.
There are three different types of coverage—personal/employee coverage, corporate coverage, and entity coverage—that provide companies with varying degrees of insurance protection. Most D&O policies exclude coverage for fraud or other criminal acts. Factors such as the size and form of the company, location, mergers and acquisitions, industry type and loss experience determine the premium rates in a typical D&O policy.
Personal liability insurance policies are purchased primarily by high-net-worth individuals or those with sizeable assets, but this type of coverage is recommended to anyone with a net worth that exceeds the combined coverage limits of other personal insurance policies, such as home and auto coverage.
Personal liability insurance makes sense for individuals who have a higher-than-average risk of being sued, such as landlords.
Homeowners insurance covers liability claims from accidents that occur on a policyholder's property, but only to a specified limit. Homeowners facing fees beyond that amount could face financial disaster.
Commonly called an umbrella insurance policy, personal liability insurance makes payments on the policyholder's behalf in cases of property and auto accidents, as well as situations that involve libel, slander, vandalism, or invasion of privacy. The policy also covers injuries that occur at secondary residences or seasonal homes, within recreational vehicles, on the premises of rental properties, or on a boat or watercraft owned by the policyholder.
The cost of an additional insurance policy doesn't appeal to everyone, although most carriers offer reduced rates for bundled coverage packages. Personal liability insurance is considered a secondary policy and may require policyholders to carry certain limits on their home and auto policies, which may result in additional expenses.
Written by Julia Kagan