How does Liability Insurance Work?

There are many kinds of insurance which you can take out to protect you against financial loss and hardship and liability insurance is possibly one of the most important for any business or individual.

Put simply, liability insurance covers you for any costs incurred through claims made against you by a third party who may have suffered loss or damage as a result of your actions. In many countries, liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for negligence.

In the United States, general liability insurance coverage most often appears in the Commercial General Liability policies taken out by businesses, and in homeowners’ insurance policies.

Liability insurance cannot be used to cover you against intentional damage or crimes committed against a third party.

The main types of Liability Insurance

Public liability – this is intended to cover a business against injury and damage to members of the public, visitors to their offices or premises, sub-contractors who work on their premises and even trespassers who are on their property illegally. Should any of these people suffer personal injury while on the company’s property. It depends on state law whether it is compulsory or not.

Even small businesses should consider public liability as an essential as the cost of defending an action brought against them could well be enough to close them down for good. Business liability insurance protects your small business in the event of a lawsuit for personal injury or property damages. It will usually cover the damages from a lawsuit along with the legal costs.

Even as a self-employed musician I was careful to have public liability insurance in place as it was quite possible that the audience at my gigs (which were barn dances)  could injure themselves by tripping over my PA system cables, by falling and injuring themselves during the dance or by being hit by falling loudspeakers pushed over by a drunken lunatic (it happened!!). I would also be responsible for any damage to the venue caused by my falling equipment.

Professional liability -This type of insurance, which is a variation of the public liability insurance,  protects your business against malpractice, errors, negligence and omissions and may be a legal requirement, depending on the business. In certain states, for example, medical doctors are required to have this cover.

Product liability – if a company manufactures a product for public use or consumption the company should be protected in the event of a person becoming injured as a result of using the product. The amount of coverage and the level of risk depends on your business type. It is common sense that a business that manufactures heavy machinery is at a greater risk of being sued for injury or damages than a company that manufactures toys, and would therefore need more liability insurance and would pay a higher premium.

Car companies can insure against design flaws in their vehicles, food companies against contamination of their foodstuffs, mechanical and recreational equipment, chemicals, medicines, pesticides and electrical equipment can all be covered by insurance.

Employer’s liability – Injuries and deaths in the workplace are, unfortunately, very common. if you employ people to work for you employers’ liability is essential. It is compulsory in then UK and most of Europe but in the USA most employers take out a Commercial General Liability Policy to cover themselves against claims made by the people they employ.

General liability – it is often the case that the specific liability insurance types covered above are included in a general liability policy. Is also known as Commercial General Liability (CGL) . It will protect your business from injury claims, property damage, and from slander or false advertising claims.

General liability insurance policies always state a maximum amount that the insurer will pay during the policy period.  If a company has a $1 million cap in its liability policy and it is successfully sued for $1.5 million, the insurer would pay $1 million and the business would be responsible for paying  the remaining $500,000. It is therefore essential that sufficient cover is taken out when purchasing such a policy.

The good news about liability insurance is that, although the sums insured can be quite high, this is one of the least expensive types of insurance available and you should be able to find a competitive quote in the marketplace.

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