What Is Liability Insurance?

Liability Insurance Explained

Woman photographs damage to car after fender bender
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Liability insurance helps cover the cost of losses you cause to another person or their property—whether through negligence or unintentional fault. The main feature of liability insurance is that it covers the costs of medical bills or repairs for other people and their property. It doesn’t pay for your medical bills or to repair your belongings if you cause an accident.

Liability coverage is an important part of several types of insurance policies, such as home or car insurance. Let’s review liability insurance and explore when you need to include it in your coverage.

Definition and Examples of Liability Insurance

After an accident that injures another person or their property, you might face liability claims or even a lawsuit. If your negligence—something you did or didn’t do—caused another person harm or damages their property, you could be held legally accountable for their losses. Liability insurance can help protect you from the costs of being liable for an accident.

Homeowners liability insurance, for example, helps protect you if someone is injured on your property and decides to sue you for damages. Your liability coverage protects you from financial losses by covering the costs of the lawsuit and any legal judgments against you.

How Liability Insurance Works

Liability protection is one of the most important types of insurance coverage. It’s designed to protect you from the cost of lawsuits and legal liability if your negligence causes harm to another person. In some cases, it’s even required. Most states, for example, require drivers to carry a minimum amount of liability car insurance. If you have a mortgage, your lender is likely to require you to have homeowners insurance, which includes liability coverage.

Liability insurance helps pay for costs associated with your legal liability after an accident. After causing an accident, you may face liability claims or even a lawsuit. Your insurance will cover costs like fees for a lawyer to defend you or repair bills to fix the damage caused by your negligence.

Let’s say you’re in a car accident and found to be at fault. The driver of the other car suffered a broken arm and their car’s door was damaged. Your auto liability insurance should pay for the other driver’s medical bills and car repairs up to the limits of your policy. Liability coverage will also pay for a lawyer to defend you in court if the other driver decides to sue.

Types of Liability Insurance

Liability coverage is available for several types of insurance policies. While the general concept of liability insurance is the same, the details of the coverage can differ between policy types. 

Personal Liability Insurance

Personal liability insurance is part of a basic homeowners insurance policy. This coverage protects you from the cost of legal liability if a person or their property is harmed by you, a family member, or your pets while on your property. It even protects you from liability if you cause damage while away from your property, excluding automobile accidents. Liability coverage is also provided by renters insurance and condo insurance if you rent your home or own a condo.

Liability Car Insurance

Auto liability coverage is specific to accidents that you cause while operating a vehicle. Like any liability coverage, auto liability coverage protects you from the cost of damages you cause with your vehicle. There are two types of auto liability insurance:

  • Bodily injury: If you hurt someone in an accident while driving your car, this coverage helps pay their medical costs, including rehabilitation and funeral expenses. It also covers economic costs related to injuries, such as lost wages if the person misses work due to the accident.
  • Property damage: This coverage helps pay to repair someone’s property if you damage it with your car. Property liability coverage isn’t limited to repairing damage to vehicles. Let’s say you accidentally swerve off the road and hit a shop’s sign. Your liability insurance can help cover the cost to repair or replace the sign. 

It’s not uncommon for a person hurt in an accident to sue for damages (like medical bills or car repairs) above the required minimum amount. You may be personally responsible for any costs above the limits of your liability coverage, so it’s a good idea to consider purchasing more than just your state’s minimum requirement.

Business Liability Insurance

Certain types of liability insurance are designed for business owners. Business liability insurance helps protect your business from the cost of lawsuits and liability when your business’s negligence causes damages to others. Common business liability coverages include:

  • General liability insurance: Also called commercial general liability (CGL), this coverage protects against financial losses if a liability claim is filed against your business. Types of covered liability include bodily injury, property damage, harm from misleading advertising, and damages due to libel or slander.
  • Professional liability insurance: This coverage is also called errors and omissions (E&O) insurance. It protects you from liability costs that result from your professional negligence or mistakes. For example, say you’re an accountant who forgot to file a client’s taxes on time, resulting in a penalty for your client. Your E&O coverage could help cover any legal action taken by your client and the damages caused by your mistake.

Do I Need Liability Insurance?

Purchasing liability insurance is one of the best ways to avoid the high costs of a lawsuit. Even if you’re a careful person, accidents can happen. Liability insurance can help protect you from accidents or moments of negligence.

For example, your usually kind dog might get scared and bite a guest at your home. Having personal liability insurance will help pay for any medical bills or legal costs if you’re found liable for the accident.

When Do I Need Personal Liability Insurance? 

Personal liability insurance is important to protect you from liability when someone visits your home or in case you cause a non-vehicle accident away from your home. You should consider buying personal liability insurance whether you rent or own your home. The good news? Personal liability coverage is part of standard homeowners, renters, and condo insurance policies.

When Do I Need Liability Car Insurance? 

Almost every state requires drivers to carry some type of liability auto insurance. If you have a car, you will likely need liability coverage through an auto insurance company.

When Do I Need Business Liability Insurance? 

Depending on the type of business you run, the number of employees on your payroll, and your field of work, you could need business liability coverage. Consider working with an insurance company that offers business coverage to find out what types of coverage they recommend for your business situation.

How To Get Liability Insurance

After determining what type of liability coverage you need, you can start comparing policies from different insurance carriers. Remember that the minimum available or required liability coverage may not be enough to cover all of your expenses if you face a lawsuit and are found liable. Talk with your insurance agent about your coverage options and whether or not you need additional liability coverage.

Key Takeaways

  • Liability insurance protects you from financial losses if you’re found responsible for an accident that causes harm to another person or damage to their property.
  • Your homeowners, renters, or condo insurance includes basic property liability coverage.
  • Most states require a minimum amount of auto liability insurance.
  • Business liability insurance protects your business if someone is harmed by business negligence.