Liability Insurance

Insurance coverage that protects against claims alleging a property owner's negligence or action resulted in bodily injury or damage to another person. It is normally included in homeowner's insurance policies.

Liability insurance is a part of the general insurance system of risk financing to protect the purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy. Originally, individuals or companies that faced a common peril, formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement).

The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium. Liability insurance is designed to offer specific protection against third party insurance claims, i. e. , payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured. The legal costs of a defense normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defense costs tend to soar when cases go to trial. Liability insurers have two major duties: the duty to defend and the duty to indemnify.

The duty to defend is triggered when the insured is sued and in turn "tenders" defense of the claim to its liability insurer. Usually this is done by sending a copy of the complaint along with a cover letter referencing the relevant insurance policy or policies and demanding an immediate defense. The insurer may decide that there is no coverage under the policy and deny the claim (meaning that its insured must defend itself), defend the case unconditionally, or defend only under a reservation of rights. The last means that the insurer reserves the right to withdraw from defending in the event that it turns out the claim is not covered and to recover from the insured any funds expended to date.

If the insurer chooses to defend, it may either defend the claim with its own in-house lawyers (where allowed), or give the claim to an outside law firm on a "panel" of preferred firms which have negotiated a standard fee schedule with the insurer in exchange for a regular flow of work. The decision to defend under a reservation of rights must be undertaken with extreme caution in jurisdictions where the insured has a right to Cumis counsel. The duty to indemnify means the duty to pay "all sums" for which the insured is held liable, up to a set policy limit. In some jurisdictions, there is a third duty, the duty to settle a reasonably clear claim against the insured so that the insured is not hit with a judgment in excess of policy limits. An insurer who breaches any of these three duties may be held liable for the tort of insurance bad faith in addition to breach of contract.

One way for businesses to cut down their liability insurance premiums is to negotiate a policy with a retained limit or self-insured retention (SIR), which is somewhat like a deductible. With such policies, the insured is essentially agreeing to self-insure and self-defend for smaller claims, and to tender only for liability claims that exceed a certain number. However, writing such insurance is itself risky for insurers.

The California Courts of Appeal have held that primary insurers on policies with a SIR must still provide an "immediate, 'first dollar' defense" (subject, of course, to their right to later recover the SIR amount from the insured) unless the policy expressly imposes exhaustion of the SIR as a precondition to the duty to defend. In many countries, liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for negligence.

The most usual classes of mandatory policy cover the drivers of vehicles, those who offer professional services to the public, those who manufacture products that may be harmful, constructors and those who offer employment.

The reason for such laws is that the classes of insured are deliberately engaging in activities that put others at risk of injury or loss. Public policy therefore requires that such individuals should carry insurance so that, if their activities do cause loss or damage to another, money will be available to pay compensation. In addition, there are a further range of perils that people insure against and, consequently, the number and range of liability policies has increased in line with the rise of contingency fee litigation offered by lawyers (sometimes on a class action basis). Such policies fall into three main classes:Industry and commerce are based on a range of processes and activities that have the potential to affect third parties (members of the public, visitors, trespassers, sub-contractors, etc. who may be physically injured or whose property may be damaged or both).

It varies from state to state as to whether either or both employer's liability insurance and public liability insurance have been made compulsory by law. Regardless of compulsion, however, most organizations include public liability insurance in their insurance portfolio even though the conditions, exclusions, and warranties included within the standard policies can be a burden. A company owning an industrial facility, for instance, may buy pollution insurance to cover lawsuits resulting from environmental accidents.

Many small businesses do not secure general or professional liability insurance due to the high cost of premiums. However, in the event of a claim, out-of-pocket costs for a legal defense or settlement can far exceed premium costs In some cases, the costs of a claim could be enough to shut down a small business. Businesses must consider all potential risk exposures when deciding whether liability insurance is needed, and, if so, how much coverage is appropriate and cost-effective.

Those with the greatest public liability risk exposure are occupiers of premises where large numbers of third parties frequent at leisure including shopping centers, pubs, clubs, theaters, sporting venues, markets, hotels and resorts. The risk increases dramatically when consumption of alcohol and sporting events are included. Certain industries such as security and cleaning are considered high risk by underwriters. In some cases underwriters even refuse to insure the liability of these industries or choose to apply a large deductible in order to minimize the potential compensations. Private individuals also occupy land and engage in potentially dangerous activities.

For example, a rotten branch may fall from an old tree and injure a pedestrian, and many ride bicycles and skateboards in public places. The majority of states requires motorists to carry insurance and criminalise those who drive without a valid policy. Many also require insurance companies to provide a default fund to offer compensation to those physically injured in accidents where the driver did not have a valid policy. In many countries claims are dealt with under common law principles established through a long history of case law and, if litigated, are made by way of civil actions in the relevant jurisdiction.

Product liability insurance is not a compulsory class of insurance in all countries, but legislation such as the UK Consumer Protection Act 1987 and the EC Directive on Product Liability (25/7/85) require those manufacturing or supplying goods to carry some form of product liability insurance, usually as part of a combined liability policy. The scale of potential liability is illustrated by cases such as those involving Mercedes-Benz for unstable vehicles and Perrier for benzene contamination, but the full list covers pharmaceuticals and medical devices, asbestos, tobacco, recreational equipment, mechanical and electrical products, chemicals and pesticides, agricultural products and equipment, food contamination, and all other major product classes. New policies have been developed to cover any liability that might be imposed on an employer if an employee is injured in the course of his or her employment.

In many states in the US, the insurers are prohibited from including conditions within their policies that seek to impose any unreasonable conditions precedent to liability, or require the insured either to take reasonable precautions or to comply with current legislation and regulations. In those countries where such insurance is not compulsory, smaller organizations are often driven into bankruptcy when faced by claims not covered by insurance.

Note that in the United Kingdom Employers Liability Insurance is compulsory, unless the only employee is the owner of the company (who holds at least 50% of the shares) or the business is a family business which is not incorporated as a limited company. Workers' compensation in the United States in most states operates through administrative adjudication outside of the federal and state courts; in turn, workers' comp insurance is regulated and underwritten separately from liability insurance.

That is, most businesses will go to a liability insurer for a Commercial General Liability policy, and to a specialized workers' comp insurer for a workers' comp policy (which is usually compulsory unless the employer can demonstrate the capability to self-insure for workers' comp). Many of the public and product liability risks are often covered together under a general liability policy. These risks may include bodily injury or property damage caused by direct or indirect actions of the insured. In the United States, general liability insurance coverage most often appears in the Commercial General Liability policies obtained by businesses, and in homeowners' insurance policies obtained by individual homeowners.

Generally, liability insurance covers only the risk of being sued for negligence or strict liability torts, but not any tort or crime with a higher level of mens rea. This is usually mandated either by the policy language itself or case law or statutes in the jurisdiction where the insured resides or does business.

In other words, liability insurance does not protect against liability resulting from crimes or intentional torts committed by the insured. This is intended to prevent criminals, particularly organized crime, from obtaining liability insurance to cover the costs of defending themselves in criminal actions brought by the state or civil actions brought by their victims. A contrary rule would encourage the commission of crime, and allow insurance companies to indirectly profit from it, by allowing criminals to insure themselves from adverse consequences of their own actions. It should be noted that crime is not uninsurable per se.

In contrast to liability insurance, it is possible to obtain loss insurance to compensate one's losses as the victim of a crime. In the United States, most states make only the carrying of auto insurance mandatory. Where the carrying of a policy is not mandatory and a third party makes a claim for injuries suffered, evidence that a party has liability insurance is generally inadmissible in a lawsuit on public policy grounds, because the courts do not want to discourage parties from carrying such insurance. There are two exceptions to this rule:Because technology companies represent a relatively new industry that deals largely with intangible yet highly valuable data, some definitions of legal liability may still be evolving in this field. Technology firms must carefully read and fully understand their policy limits to ensure coverage of all potential risks inherent in their work.

Typically, professional liability insurance protects technology firms from litigation resulting from charges of professional negligence or failure to perform professional duties. Covered incidents may include errors and omissions that result in the loss of client data, software or system failure, claims of non-performance, or negligent overselling of services. For example, some client companies have won large settlements after technology subcontractors’ actions resulted in the loss of irreplaceable data. Professional liability insurance would generally cover such settlements and legal defense, within policy limits. Additionally, client contracts often require technology subcontractors working on-site to provide proof of general liability and professional liability insurance.