Purpose of Liability Insurance
People can lose valuable assets and suffer financial disaster as a result of lawsuits filed against them. Legal Reform Now reported that more than 15 million lawsuits were filed in 2004, which equals a new claim every two seconds, and Estate Street Partners, LLC, reported that 1.8 million people were sued that year. A liability insurance policy can protect your assets.
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Function
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The purpose of liability insurance is to cover your financial expenses in case you are sued. A liability policy pays for legal defenses and settlements on your behalf to a third party who has suffered losses, up to predetermined limits.
Policy owners have two options regarding liability limits: split limits and combined single limits. A policy with a split limit indicates a separate amount for each person involved in the claim as well as for each occurrence or incident. The combined single limits include only one specified amount the policy will pay per claim.
History
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Liability insurance originated in the 19th century after the passage of employer's liability laws in Germany and by the English Parliament. These were the first laws that compensated injured employees without the employees having to sue to prove their employers' negligence.
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Types
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The five basic types of liability insurance are personal umbrella, general, product, professional, and employment practices. A personal umbrella policy extends the coverage from your basic auto and home insurance policy to increase your limits of liability. This type of insurance is specific to an individual and does not cover a person's business.
General liability insurance covers companies for bodily injury, property damage, personal injury and false advertising claims, while product liability insurance covers claims for businesses regarding defective products. Professional liability protects individuals who work in specialized careers, such as doctors or counselors, against claims from their clients. Employment practices liability insurance (EPLI) protects companies from legal-rights violation claims made by employees.
Considerations
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Public figures, consultants and individuals employed in service-oriented and medical fields can be targets for lawsuits. Professionals such as real estate agents, lawyers, accountants, therapists, and insurance brokers also should have liability insurance to protect their businesses, reputations and finances.
Warning
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The limits of liability within a policy should be high enough to adequately cover your possessions. If your policy limits are too low, you'll be personally responsible for any difference between the costs of the lawsuit and the policy's limits. The coverage should at least equal your net value.
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References
- Legal Reform Now: Reduce the Large Number of Lawsuits
- IRMI: How Umbrella Policies Started Part 1: Early Liability Coverage
- Geisen Insurance Brokers, Inc.: What Is Professional Liability Insurance & who needs it?
- Small Business Solutions: Understanding General Liability Insurance
- Estate Street Partners, LLC: Frivolous Lawsuits & Asset Protection
Resources
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