What Is Liability?

Liability Explained in Less Than 5 Minutes

A customer about to step into a puddle of water in a supermarket
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Liability means one person’s responsibility for something owed to another person. In insurance, the word means an obligation one party has to another under the law or a contract.

Businesses have legal duties to customers, clients, employees, and many other parties, including the general public. If a business fails to fulfill its legal obligations and someone is injured as a result, the business may be obligated to compensate the injured party financially.

Definition and Examples of Liability

Liability means an obligation a person or business has to another. Within the context of insurance, liability means a legally enforceable duty to pay a sum of money to another party as compensation for harm.  A common source of liability for businesses is an accident caused by an employee that injures a customer or other third party.

For example, suppose you operate a grocery store that offers delivery service. Steve, an employee of yours, is driving a company-owned delivery van when he accidentally side-swipes another vehicle, causing a crash. Steve isn’t injured but a passenger in the other vehicle suffers a broken arm.

As Steve’s employer, your business is “vicariously liable” for the accident he caused due to his negligent use of the van. If the injured passenger files a claim against your business seeking compensation for their injury, your business (or your insurer) must respond to their demand.

How Liability Works

Liability may be imposed on businesses by criminal law, civil law, or both.

Civil vs. Criminal Liability

A crime is a violation of public law and is prosecuted by the government. If the perpetrator is found guilty beyond a reasonable doubt, they may be punished by incarceration, probation, or a fine. Violations of civil law are handled by the courts, and liability is determined based on a preponderance of evidence. If found liable, defendants may be required to pay compensation, called damages, to plaintiffs. Businesses can protect themselves from civil liability by purchasing liability insurance. Criminal liability is not insurable because insuring crimes is against public policy.

Crime insurance covers victims of crimes, not the perpetrators. It compensates victims for financial losses they’ve sustained as a result of burglaries, robberies, and other acts committed by criminals.

Sources of Civil Liability

A primary source of civil liability is torts, or civil wrongs that cause injury or damage to others.  Most tort claims are based on negligence but some involve other torts such as false arrest, assault, slander, and violation of privacy.

Civil liability also may be imposed on businesses by state laws. For example, many states have passed product liability laws that make manufacturers strictly liable for injuries caused by product defects. Under strict liability laws, manufacturers are responsible for third-party injuries caused by their faulty products even if the manufacturers weren’t negligent.

Another source of civil liability is a contract. Many business owners sign contracts in which they assume liability for claims against another party.

For example, say Primo Painting, a painting contractor, is hired by Apex Apartments to paint the exterior of a building. Primo Painting signs a contract in which it assumes liability for any claims filed against Apex Apartments that may arise from Primo’s painting work. If someone is injured at the apartment complex due to Primo’s negligence and files a claim against Apex Apartments, Primo Painting will be liable for any compensation awarded to the injured party.

Types of Liability

There are many ways in which businesses can become liable to other parties. Here are the most common types of liability.

Premises Liability 

Many small companies maintain a business premise such as an office, store, or warehouse. A business location can be a source of liability if a customer, vendor, contractor, or other visitor is injured on the premises and files a bodily injury claim.

Operations Liability 

Businesses that perform their operations off-site may be liable for bodily injury or property damage they cause at customers’ locations; for example, when an employee of your janitorial business is cleaning a customer’s office when they accidentally break a glass statue.

Product Liability

Many businesses manufacture products they sell to other businesses or the public. Products can create liability for a business if they are defective and cause injuries to users.

Professional Liability 

Businesses that give professional advice may be liable for errors or omissions they make that cause others to sustain financial losses; for example, if an accounting firm makes a mistake in a client’s financial statement that causes the client to lose a lucrative contract.

Auto Liability 

Business owners or their employees can create liability for the company if they negligently cause an auto accident that injures a third party or damages their property.

Key Takeaways

  • Liability means an obligation one party owes to another. In an insurance context, liability means a legally enforceable duty to compensate another party for an injury.
  • Liability may be imposed on businesses by criminal or civil law, but only civil violations are insurable.
  • Businesses may become civilly liable to other parties via a statute, a contract, or a tort such as negligence.
  • There are many sources of business liability, including premises, products, operations, professional advice, and autos.