Liability Insurance

I

Introduction

Liability Insurance, type of insurance used to cover the risk of incurring legal liability to pay money damages. Such insurance guarantees financial protection to an insured party who might be required to pay damages resulting from legally negligent conduct (see Negligence). The negligent act may be one that causes personal injury, death, or property damage. Liability for negligence may result not only from the conduct of the insured, but also from the conduct of his or her agents and employees. Acts of negligence resulting in liability occur in connection with a wide variety of private and commercial activities, such as the operation of a motor vehicle, the conduct of a business, and the ownership or occupancy of property. Liability insurance sometimes is called third-party insurance, because the insurance company protects the insured against suit by a third party, that is, the claimant.

A policy of liability insurance generally provides for investigation, negotiations for private settlement of claims, the defense of lawsuits brought against the insured, and the payment of judgments or judicially approved settlements up to the limits specified in the policy. Ordinarily, the assistance and cooperation of the insured is required in the defense against the claim.

Since legal liability may arise in many situations, liability policies usually do not assume all the risks of liability. Some important types of liability insurance are discussed below.

II

Automobile Insurance

Automobile liability insurance policies assume the risk of financial loss arising from liability for bodily injury or property damage to third parties caused by automobile accidents. Such policies are available not only to car owners and operators, but also to garage and service-station operators and others concerned with the repair, storage, or sale of motor vehicles.

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Financial-responsibility laws exist in almost every state in the U.S. and require car owners who have been involved in vehicular accidents or are guilty of certain offenses to obtain automobile liability insurance of a specified minimum amount before they are licensed to drive a car again. In addition, about half of the states have compulsory automobile liability insurance laws that require all car owners to obtain automobile liability insurance before they register their cars, thus assuring that innocent victims of automobile accidents will be compensated for personal injury and property damage.

Automobile liability policies provide coverage for damages arising from bodily injury, sickness, disease, or death resulting from automobile accidents. Coverage is provided also for liability from damage to or destruction of property, including the loss of use. Limits of liability in excess of the basic limits for personal injury and property damage can be purchased for an additional charge.

Some states have no-fault automobile insurance laws, under which the injured party is paid for medical expenses and lost wages regardless of who caused the accident. Thus, within the limits of such policies, the concept of liability insurance is replaced. Many such laws permit the injured party to sue for loss if it exceeds the threshold specified by law (for example, if it is a “serious” injury).

III

Business and Professional Liability Insurance

Liability insurance protection is provided by various policies that assume the risk of legal liability of those who own, operate, or occupy residential or business premises, who manufacture or distribute commodities, or who render services. Special policies are also available to manufacturers and merchants to cover possible legal suits arising from defective products that cause injury or death to the purchaser.

Professional (malpractice) liability protection has become an important kind of insurance, especially for members of the medical profession. Other major types of commercial liability insurance are contractual, storekeepers’, and farmers’ liability. Many other comprehensive forms afford insurance against a range of liability hazards. See also Malpractice.

IV

Personal Liability Insurance

Comprehensive personal liability insurance is used widely by tenants and homeowners to protect themselves against legal liability for negligent maintenance and operation of the premises, as well as for personal activities away from the premises. This protection is generally included in a homeowner’s policy that also provides property coverage such as fire insurance.

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