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Liability
insurance is designed to offer specific protection against third
party 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 and contractual
liability are not covered under liability insurance policies. When a
claim is made, the insurance carrier has the right to defend the
insured. The legal costs of a defense are not always affected by any
policy limits, which is useful because they can be significant where
long trials are held to determine either fault or the amount of
damages.
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.
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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:
Public
liability
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.
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