Liability Insurance: Definitions and Terms


Definition of Liability Insurance. The insurance coverage that protects against claims alleging negligence or improper action caused bodily injury or property damages is called “liability insurance”.

If they are found to have caused the damage to the property or bodies of others, people and organizations can make and admit mistakes. Insurance policies provide protection. When the insured is legally responsible for the negligent act, liability coverage covers it. The coverage can provide protection in certain situations if the insured is morally obligated to pay damages to another party as a result of negligent acts.

The coverage needed to protect people/organizations can vary depending on their business and social conduct. There are many coverage options that offer protection for each group of people or organizations. Different organizations/people require different amounts/types of liability coverage.

Classification of Liability

Personal vs. Commercial Liability: While personal liability insurance covers individuals, commercial liability coverage covers businesses. Personal auto liability insurance is required for a 4-door sedan car. A commercial auto policy may be required if the vehicle is being used for delivery.

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Personal Liability Protection is usually included in personal policies like Personal Auto Policies (PAPs), Homeowners Insurance Policies and Boat Policies. These coverages cover bodily injury, personal injury, property damage, and legal defense for claims against the Insured.

Business/ Commercial Liability Insurance: This protection covers individuals and businesses in relation to their business activities.

Premises liability applies to anyone who, other than the insured or their employees, sues the company for injuries sustained on business premises. The injured party must have suffered an injury at your premises before they can file a claim for damages.

Product Liability covers business-completed products and services. Similar coverage is offered under the term “completed operations” which covers multiple contractors in the event they cause damage to others during their service rendering. Special professional liability coverages are available for professionals such as lawyers, agents, brokers in real estate, and doctors.

Professional Liability. This provides protection for many types of people and businesses against bodily injury damages that their advice or service may cause to others. Some examples include malpractice insurance for doctors, medical staff, and errors & omissions by insurance & real-estate agents.

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Employer’s liability provides protection for employees while they are employed. For coverage to kick-in, the employer must be at fault or negligent. Workers Compensation does not require that fault or negligence be proven in order for an employee to receive compensation for work-related injuries.

Directors and officers insurance protects the owners of the business from lawsuits. Garage Liability is applicable to businesses that deal with vehicles owned or leased by others. This coverage protects against the risk of being sued due to the use of vehicles owned by the company and vehicles owned by clients. A special coverage called “Garagekeeper Liability” is required in the event that an individual or business works with other people’s vehicles. Garage Keeper Liability covers vehicles that are not owned by the company while they are in the business’s possession. It also provides collision and comprehensive coverage. Garage liability protection is required for businesses such as auto service stations, valet parking companies, towing businesses, and car washes. Garage keeper liability can either be written on a Direct Basis basis or an Excess basis. Direct Basis policies will cover damage to vehicles caused by the clients of the Insured, regardless of fault. Excess will only cover damages to vehicles caused by negligence of the Insured.

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Liquor Liability protects establishments that sell alcohol (packaged liquor, taverns and manufacturers of liquor) from any loss or damages resulting from patrons becoming intoxicated or injuring others.

Inland Marine/ Cargo Liability protects businesses involved in the transportation of merchandise or other property. It covers the costs of damages to the property hauled if the Insured is held liable.

Time Factors in Liability Insurance Policies

Claim Made Basis is a basis for some commercial liability insurance policies. This means that the policy in effect at the time of a claim against an insured will cover losses regardless of their date. Professional liability policies are usually written on a Claim Made basis. Commercial liability policies are usually written on Occurrence Basis. This means that even though the policy has expired, as long as it was in effect at the time of the injury or damage, you can still make a claim against it.

Limits on Liability

CSL, or Combined Single Limit policies, allow insurance companies to combine property damage liability insurance and bodily injury liability insurance under a single limit. No matter whether the claim is for property or bodily injury, the insurance company will pay the limit stated on any third party claim. Split Limit policies would allow for the breakdown of limits such as bodily injury limit per person, bodily injuries limit per accident, and property damage per accident.

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An example of this is an auto policy that has CSL $300,000. It will cover all claims, regardless of whether it is bodily injury to one person or multiple people, and property damage caused by the Insured. The policy limits can be separated (100/300/50). This means that the insurer will only pay $100,000 for bodily Injury for one person, $300,000.00 for all bodily injuries for all others, and a maximum of 50%50 for property damage due to the insured’s negligence.