What Is Liability Insurance?

Liability insurance, also called third-party insurance, protects the insured from claims arising from injuries and damages to other people or property. It covers legal costs and legally required payments resulting from the actions of the insured. Liability insurance does not cover intentional acts or contractual liabilities.

Who Uses Liability Insurance?

Anyone who may be exposed to liability lawsuits is a prime candidate for liability insurance. If you drive a car, own a business, are a doctor or lawyer, or interact with the public in any way, liability insurance may make sense for you.

There are personal liability policies for homeowners and drivers. Commercial liability policies exist for business owners.  

Types Of Liability Insurance

The six primary types of liability insurance include:

1. Product liability insurance

This type of insurance protects manufacturers or sellers of products that may cause injury or death to consumers.

2. Workers compensation and employer liability insurance

This is insurance purchased by business owners to protect themselves from liability arising from injury or death of an employee.

3. Director or officer liability insurance

This protects against liability for corporate directors and officers.  

4. Indemnity insurance

This is used to protect a business from negligence claims arising from financial mistakes or failure to perform.  

5. Umbrella policies 

These policies protect against catastrophic liability claims that are greater than the standard policies carried by the insured. 

6. Commercial liability insurance 

This insurance protects a business from a variety of liability issues arising from the operation of the business.

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Rachel Siegel, CFA
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Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years creating professional financial certification exams and another 20 years of college-level teaching.

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