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Liability Insurance

What is liability insurance?

Liability insurance, or third-party insurance, is a subset of insurance that protects the policyholder from legal cases in which they are liable. Instead of paying the compensation themselves, the insurer handles payment, saving the policyholder a potentially significant sum of money in legal expenses. The insurer is able to cover legal costs due to a premium that the policyholder pays.

Who uses liability insurance?


In most countries, liability insurance is mandatory for drivers as the minimum type of car insurance. This is so the policyholder will be able to compensate other drivers in case of an incident.

Businesses in general

Whether it is mandatory by law or not, most businesses at least consider purchasing liability insurance, as the cost of cases against them can be potentially devastating. However, small businesses that cannot afford their premiums often forego covering themselves at the risk of having to settle a legal battle without the help of an insurer.

Insurance for businesses also covers more unpredictable compensation for workers, such as emotional stress or discrimination in the workplace.

Products made by businesses

Businesses do all they can to test products, but they can still lead to lawsuits after release. Famous cases include malfunctioning cars or mobile phones and often result in mass recalls. Therefore, companies that make products may take out liability insurance to cover the potential costs of recall and compensation.

Technology companies

Many technology companies are having to invest heavily in liability insurance as technology is advancing faster than insurance policies can keep up. There have been many liability cases against tech companies in recent years, especially in the area of personal data.

What does liability insurance cover?

In most cases, liability insurance covers the policyholder’s responsibility in the event of being sued. This is usually in the form of compensation to cover the costs of damage to the third party.

Typical claims include customer injuries, damage to third-party property and lawsuits from harm to reputation, misleading advertising, and even medical expenses. While it covers legal bills, it does not offer protection if the policyholder has broken the law.

Each insurance policy can be customized to the policyholder’s specific needs, which makes it ideal for businesses. Companies that work in adventure holidays, for example, have a much higher risk of liability cases against them, so can adjust their policy accordingly.

Related Questions

How is liability insurance different from other types of insurance?

Most insurance means the policyholder receives payment in the event of a peril. However, with liability insurance, the policyholder must pay out in the event of a peril outlined in their policy.

This is because while most types of insurance protect your property or reputation, liability insurance covers the costs incurred when you are allegedly at fault for an incident. These incidents can range from bodily injury on your business’ premises to you damaging another party’s property.

Is liability insurance required by law?

In general, the law does not require it for individuals. However, in many countries, liability cover is a requirement to obtain a professional license like electricians licenses.

Similarly, the law generally does not require businesses to insure themselves against liability. Even so, most choose to do so in order to avoid paying the potentially much higher costs of settling a deal themselves.