Basics of Liability Insurance

Liability insurance is coverage that companies and private individuals purchase to protect them from the possibility of being sued. It is important to understand liability insurance, and it is critical for a business owner to understand the consequences of not carrying liability insurance.

Identification

When a company offers a product or service, it is expected to have an expert level of understanding pertaining to that product or service. If a client suspects that their injury or personal loss was due to the negligence of the company that supplied the product or service, that client can sue the company. Liability insurance protects the company by paying for legal representation and settling any monetary damages, up to the limits of the policy.

Sub-Contractors

Liability insurance is the way that businesses protect themselves from lawsuits and bad business relationships with other companies. A company with liability insurance is protected from the faulty work of others as it relates to a project it is directly responsible for. For example, if a general contractor hires a subcontractor that decides to sue the general contractor over terms of the job, liability insurance will protect the general contractor from significant financial loss. With liability insurance, the insurance company pays legal costs and settlement costs, but without liability insurance all of those costs must come from the company itself.

Types

Liability insurance is normally considered a specialty form of insurance that is not a normal part of a business insurance policy. In order to get liability insurance, a company must request a specialized policy from its insurance provider that would be customized to the company's business and potential losses.

Umbrella Liability

An umbrella liability policy is an additional insurance agreement that expands the limits of the personal liability insurance included in homeowners or auto insurance policies. In most cases, an insurance companies require that the homeowners or auto insurance policies already have substantial liability coverages before they will consider authorizing an additional umbrella policy.

Warning

Many companies attempt to do business without having liability insurance in effect, and this can be a way for the company to reduce its insurance premium costs in the short term. However, without liability insurance a company is responsible for paying all of its legal representation charges as well as any monetary damages awarded in court. This can be a very expensive proposition.