Liability Insurance Definition

The "Legal-Ease" Glossary
Liability Insurance

This is a general term for the type of risk financing that can protect your small business when someone files a lawsuit against it.

In the event that someone files a claim alleging you are responsible for their financial loss, liability insurance can cover the cost of the lawsuit. In exchange for a premium, an insurance provider offers you financial and legal protection in the event that a liability claim arises – just so long as the liability in question is covered under your policy and the claim does not exceed that policy's limits.

What sets liability insurance apart from other types of insurance is that it deals specifically with third-party claims, and the insurance company makes payments to those third parties directly – not to you.

Liability insurance policies usually offer coverage for…

  • Lawyers’ fees.
  • Settlements (when you resolve the dispute out of court for a set sum of money).
  • Judgments (the damages a judge orders you to pay when you lose a lawsuit).
  • Other court costs.
  • Immediate damages (e.g., medical expenses or property repair costs).

Here are some of the most common types of liability insurance policies small-business owners purchase to safeguard their business from the high cost of lawsuits:

  • General Liability Insurance. This kicks in when your business is sued over third-party premises liability, property damage, or advertising injury. Some policies pay for medical expenses or property damages after an incident to avoid a lawsuit.
  • Professional Liability Insurance (aka Errors & Omissions Insurance). This policy comes in handy when your business is sued over professional negligence or mistakes in your work.
  • Cyber Liability Insurance. If your business suffers a data breach, this policy can cover the costs associated with notifying affected parties and repairing your reputation. A third-party defense policy steps in when your business is sued over a data breach.
  • Workers’ Compensation Insurance. You’ll need this policy to address employees’ occupational injuries. It can cover their medical expenses and replacement wages. It can also cover your legal expenses if they waive those benefits and sue your business instead.
  • Employment Practices Liability Insurance. If you’re sued over unfair work practices (e.g., breaching employment contracts), this policy can cover your legal expenses.

Learn more in our blog post “What Is Liability Insurance?

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