Liability Insurance: Definition & Overview

Liability insurance is a type of insurance that protects individuals or businesses from legal claims due to injuries, property damage, or negligence. It covers the policyholder’s legal responsibility to third parties, including legal defense costs and settlements.

Types of Liability Insurance

1. Personal Liability Insurance (For Individuals)

  • Covers bodily injury or property damage caused by the policyholder.
  • Included in homeowners, renters, and auto insurance policies.
  • Example: If someone slips and falls at your home, liability insurance covers their medical bills and legal costs.

2. General Liability Insurance (For Businesses)

  • Protects businesses from claims related to injuries, property damage, and advertising mistakes.
  • Essential for small businesses, contractors, and service providers.
  • Example: If a customer gets injured at a store, the store owner’s general liability insurance covers the claim.

3. Professional Liability Insurance (Errors & Omissions – E&O)

  • Covers mistakes, negligence, or inadequate services provided by professionals.
  • Common for doctors, lawyers, consultants, and financial advisors.
  • Example: A doctor is sued for malpractice—this insurance covers legal costs and damages.

4. Product Liability Insurance

  • Protects manufacturers and sellers from claims due to defective or harmful products.
  • Example: A company sells a defective toy that injures a child—the insurance covers legal claims.

5. Employer’s Liability Insurance

  • Covers employers against lawsuits from employees who are injured at work (beyond workers’ compensation).
  • Example: An employee sues for unsafe working conditions—this insurance covers legal defense.

6. Umbrella Liability Insurance

  • Provides extra liability coverage beyond standard policies.
  • Kicks in when primary insurance limits are exceeded.
  • Example: If an auto accident claim exceeds standard auto insurance, umbrella coverage helps pay the remaining costs.

What Liability Insurance Does NOT Cover

❌ Intentional damage or harm
❌ Criminal acts
❌ Employee injuries (covered under workers' compensation)
❌ Damage to the policyholder’s own property