What is Liability Insurance?

Liability insurance is like paying your debts with someone else’s checkbook…

Sometimes you end up owing someone money because of a mistake you made. Suppose that instead of having to pay with your own money, you could use someone else’s checkbook. That’s kind of how liability insurance works — If you owe someone money for an incident you cause, your liability insurance might cover it.

If you are responsible for an accident or someone gets hurt on your property, you might have to pay their expenses, including medical and legal bills. Liability insurance is a type of coverage you can buy to cover damage you cause to someone else’s body, property, or reputation.

Liability coverage can be a part of a more comprehensive insurance policy, such as auto insurance or homeowners insurance. You can also buy specific liability insurance to protect your business or personal assets. Most states require that all drivers carry auto liability coverage, but other types of liability insurance may not be required.

Liability coverage usually comes in one of two forms. First, you can have liability coverage as a part of a broader policy. In the case of auto insurance and homeowners insurance, liability is just one component of your coverage. These policies are likely to cover not only damage you cause, but also damage to you or your property.

You can also get liability insurance as a standalone policy. These include personal umbrella insurance, professional liability insurance, and general business liability insurance. To purchase umbrella insurance, companies require that you first have a base auto or home insurance policy in place.

Under standalone liability insurance policies, your provider is there to cover your losses in certain cases if you’re responsible for damaging someone else’s property or person. If this happens, you file a claim with your provider. The company will then cover some or all of your losses, up to the policy limit, as long as your policy covers the incident. You may have to pay a deductible.

There are several kinds of liability coverage you can buy, either as a standalone policy or as a component of a more comprehensive plan.

Most states require that all drivers have vehicle liability insurance coverage. This kicks in when you’re at fault for an accident. Your policy may cover damage to another person’s vehicle, as well as medical bills if the other driver sustains injuries.

If someone gets hurt at your home, regardless of whether the incident was your fault, you might be stuck footing the bill. You could also be responsible for legal costs, such as attorney and court fees. For this reason, homeowners insurance policies usually include liability coverage.

Umbrella insurance is a way for individuals to give themselves added security, beyond their existing liability coverage. Umbrella insurance stacks on top of other insurance policies. So if you’re responsible for a car accident, and the cost of the damages exceeds your auto insurance policy limits, umbrella insurance would kick in and cover the rest. Umbrella insurance covers bodily injury, property damage, and personal injury (including lawsuits such as libel and slander).

General liability insurance is a policy that allows business owners to protect themselves against potential bodily injury, property damage, and personal injury claims that happen during normal operations. Though many business structures allow the owner to avoid personal liability for the business’s debts or obligations, a lawsuit can still end up bankrupting a business — Lawyers are expensive! That’s where general liability insurance comes in.

Errors and omissions insurance is for professionals who offer a service or advice to clients, including consultants, lawyers, and accountants. This type of work can often make someone more susceptible to a lawsuit, which is why many professionals choose to carry special insurance. Depending on your business, you may need other types of insurance as well. Data breach insurance is an option for companies that collect confidential information. Employment practices liability coverage can help protect your business against claims by workers. such as wrongful termination or discrimination.

If you serve as a director or officer of a corporation or nonprofit organization, you may be liable for claims around wrongful acts or breaches of duty. Directors and officers insurance specifically covers this type of claim.

There are plenty of other situations that might make it a good idea to have some sort of liability insurance. If you have a vehicle other than a car, such as a motorcycle, snowmobile, or boat, you may want liability insurance for when you use those items.

Regardless of what type of liability insurance you have, there are some basic things that your policy will probably cover. First, liability insurance covers damage you cause to someone else’s physical property. For example, suppose you’re a contractor renovating someone’s kitchen. Due to an unfortunate accident while you’re working, you cause the roof to collapse. If you have general liability insurance for your business, your policy would likely cover this damage. In the case of car insurance, your policy would cover the dent you put in someone’s car while maneuvering in a packed parking lot.

Liability insurance also covers bodily injury. If you physically injure another person in a car accident or professional mishap, or even if someone breaks an arm cannon-balling into your backyard pool, bodily injury coverage may apply. It might also cover the pain and suffering or lost wages that the injured person experiences.

Some kinds of liability insurance can also cover other personal injury claims. These include lawsuits for slander or libel, which are false spoken or written statements that injure someone’s reputation. Liability coverage in your auto insurance policy won’t include this type of claim, but umbrella and general liability insurance may.

In some cases, liability coverage comes in the form of its own insurance policy. In the case of general business or professional liability insurance, you’re specifically buying a policy to help protect you against lawsuits from others. But in other cases, such as with auto and homeowners insurance, liability coverage is just one piece of the puzzle.

Let’s look at auto insurance as an example. Most states require that drivers have some level of car insurance. In general, they only require liability insurance. That way, if a driver causes an accident, he or she will be better able to cover the other driver’s damages. But liability coverage doesn’t cover the cost to fix your own car or pay your own medical bills — For that, you would need comprehensive coverage insurance.

To have full protection against various kinds of claims, you would need the following types of coverage in your auto insurance policy:

• Collision: This type of coverage helps pay the cost of repairs if you’re in an accident and damage your vehicle. If you cause an accident with another driver, liability coverage protects the other car, while collision coverage protects yours.
• Comprehensive: Comprehensive coverage helps pay to repair damage to your vehicle in cases other than an accident. That can include vehicle theft, vandalism, or damage from extreme weather.
• Medical payments and personal injury protection: If you or a passenger in your vehicle are injured in an accident, medical and personal injury coverage might help. This coverage can help pay for medical expenses, as well as lost wages or childcare.
• Uninsured and underinsured: While most states require that everyone has liability insurance, some people don’t follow the rules. You don’t want to end up in an accident in which an uninsured driver is at fault and can’t cover the damages. Uninsured and underinsured coverage helps to close that gap.
• Rental reimbursement: The purpose of rental reimbursement coverage is to cover the cost of a rental vehicle while yours is in the shop after you file a claim for damages.

Sometimes, as is the case of auto insurance, the government tells you that you have to purchase liability insurance. In most other situations, that’s not the case, but some people still might want to consider it.

Liability insurance may be a good idea anytime you have a life circumstance that increases your odds of being sued. Business owners can be at risk of lawsuits. Whether you’re a doctor facing a malpractice accusation or own a skating rink where people often fall down, you may not want to risk losing all your assets in a lawsuit. Even if you aren’t a business owner, working in certain professions, such as medicine, can put you at greater risk of a lawsuit.

Even if you aren’t a business owner or someone who faces risks on the job,other factors might cause you to want liability insurance. Several conditions that might increase your risk for a lawsuit include:

• Having a dog that could bite someone
• Owning rental properties
• Owning a home
• Coaching a children’s sports team
• Having hobbies where injuries are common, such as snowmobiling or ATVing