What is Liability Insurance? Do You Need It and Types Available
Written by Simon Taylor
06th May 2024
What is liability insurance?
Liability insurance is a type of business insurance that provides protection against a claim resulting from injuries and damages to people and property. It covers legal costs and damages for which the insured could be found liable, up to the limit of the policy. Liability insurance is essential for safeguarding against financial losses that can arise from legal actions due to accidents, injuries, or negligence.
Understanding liability insurance
Understanding liability is crucial for navigating legal landscapes, whether in personal, professional, or public domains, ensuring that parties are held accountable for their actions and that victims can receive compensation. The concept means being legally responsible, it is a principle that holds individuals and entities accountable for actions or omissions that cause harm or damage to others.
Whereas, insurance provides a financial mechanism that allows individuals, businesses, and other entities to transfer the financial risk of loss or claim to an insurance company. In exchange for a premium, they agree to compensate the insured for specific potential losses or claims covered under the policy.
What is public liability insurance?
Types of liability insurance:
There are several types of liability insurance, each designed to cover specific risks associated with different activities or professions. Each type of liability cover is tailored to manage and mitigate these distinct risks, ensuring that the insured parties are adequately protected against potential financial losses from a claim of compensation.
Public Liability Insurance
Public liability insurance is one of the most common forms of liability cover, designed to protect businesses and individuals against the financial risk of being found liable for negligence that leads to injury or damage to third parties or their property. It's especially relevant for businesses that interact with the public. Public liability insurance is crucial for businesses that are exposed to the general public, as it helps mitigate the potential high costs associated with a legal claim.
Employers’ Liability Insurance
Employers liability insurance is a mandatory type of liability protection that all businesses must have if they employ staff. The business insurance is designed to protect against the financial cost of claims made by employees who have suffered injury or illness as a result of their work. Employers' liability insurance is vital in the UK as it ensures that employees can receive compensation for workplace-related injuries or illnesses without the need to prove employer negligence, while also protecting employers from the potentially severe financial impact of a claim.
Professional Liability Insurance
Professional liability insurance, also known as professional indemnity insurance, is designed to cover professionals who provide advice or services from the financial consequences of negligence, errors, and omissions in the performance of their professional duties. This type of liability insurance is particularly crucial for professionals who provide advice or services. It protects against a claim of negligence, misrepresentation, or mistake in the professional services rendered.
Product Liability Insurance
Product liability insurance is designed to cover businesses that manufacture, distribute, or sell products from financial losses due to legal action resulting from injuries or damages caused by their products. This type of liability cover is essential for companies involved in the production or supply chain of physical goods, as it addresses claims related to product defects, design flaws, or inadequate safety warnings or instructions. It's important to note that product liability insurance does not cover financial losses due to a product failing to perform as advertised unless this failure results in injury or damage.
Directors and Officers Liability Insurance
Directors and officers (D&O) is a form of business insurance specifically designed to protect the personal assets of directors and officers. This liability coverage can offer financial protection against a claim brought against directors and officers of a company for alleged wrongful acts such as errors, omissions, misstatements, misleading statements, neglect, or breaches of duty. This type of business insurance is critical as it covers the gaps that are not typically covered by general corporate liability insurance.
Cyber Liability Insurance
Cyber liability insurance is a type of business insurance designed to cover a claim arising from the financial consequences associated with various types of cyber incidents - including data breaches, cyber attacks, and other information security-related issues. Network security and privacy liability insurance is increasingly important to counterparties if you are providing a service function. Third-party damages and regulatory penalties as a result of flaws in the insured’s network or information security can be expensive.
Is there a difference between general liability and public liability insurance?
General liability insurance is a term typically used in North America, whereas in the UK it is more common to break the cover down into public liability and products liability.
If you are dealing with a counterparty in the US or Canada, they may request you have minimum amounts of general liability coverage in place. As insurance brokers, we can provide you with the required certificates of insurance to meet such cover requirements.
Can you provide some claim examples under a public liability insurance poilcy?
Public liability covers claims made against your business by the public or third parties who have suffered injury or property damage due to your business activities. Below are some examples of where public liability cover and provide protection against compensation claims:
Slip and fall accidents
One of the most common claims under public liability cover involves individuals slipping, tripping, or falling due to unsafe conditions on business premises. For example, if a customer slips on a wet floor in a retail setting and sustains an injury, they may claim against the shop for their medical costs and loss of earnings.
Property damage
If your business activities cause damage to someone else’s property, public liability cover can protect against the costs of repairs or replacement. For example, if a contractor accidentally breaks a window while working at a client's home, the cost of replacing the window would be covered.
Bodily injury
If your business organises events for example, public liability cover and protect against injuries that occur as a result of your activities. For instance, if a piece of equipment falls and injures a visitor at a trade show booth you're hosting, the business insurance would cover their medical treatment and potential compensation.
How does liability insurance work?
If an incident occurs that the liability insurance protects against, for example an accident causing injury to a third party. The claim for compensation will trigger a policy condition and the insured party will need to notify the insurer and make a claim under the policy. It is the responsibility of the insured party to provide all necessary details about the incident and any third-party demands or legal actions. The circumstances detailed in the claim notification will need to describe how the insured party is potentially liable to another party.
Liability insurance policies have limits, which cap the amount the insurer will pay toward a single claim or all claims during the policy period. These limits are established when the policy is purchased. All liability insurance policies have exclusions that define what is not covered. Common exclusions can include intentional acts, contractual liabilities, and, in some cases, specific types of negligence or areas of operation.
Choosing the right liability insurance
Choosing the right liability insurance is crucial for ensuring adequate protection against potential legal and financial risks. Small businesses should understand the different types of coverage availbale. Liability insurance is crucial for protecting against potentially massive financial burdens that could result from legal actions.
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About the author
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.