Liability insurance, a part of the general insurance policy, is a policy that protects the insured from damages that have been caused by injuries, negligence or malpractice. It covers legal costs and payouts that the insured will have to pay should he be found liable. It does not cover criminal liabilities, intentional damage, and contractual liabilities.

Liability insurance is crucial for those who are held responsible for the injury of another or the damage to another’s property. For instance, those who practice medicine or run businesses. Should an employee be injured while on duty, or should a product be faulty, a liability insurance covers the businessman or the product manufacturer. Payment from a liability insurance is not for the insured. It is generally for someone who has suffered damage but is not part of the insurance contract.

Liability insurance is more prevalent in developed markets than the developing ones. Given the size of the U.S. economy, the U.S. has one of the highest records of liability insurance premiums written in the past few years.

Some of the types of liability insurances include the employer’s liability and workers’ compensation, a mandatory protection for employers for liabilities arising from an employee’s injury or death; product liability insurance to cover product manufacturers from lawsuits due to injury or death caused by their products to consumers. It also includes indemnity insurance to cover a business that has a lawsuit against it for monetary harm caused by negligence; director and officer liability coverage to cover a business with a board of directors should the company be sued. They also include an umbrella liability policy to cover lawsuits arising due to losses from catastrophic events; the comprehensive general liability policy, otherwise known as CGL, that protects businesses, corporates, and organizations from lawsuits arising due to physical injury, damage to property, personal injury and defamation.

Insurers of the liabilities mentioned above have a certain number of responsibilities to carry out:

• The first is the duty to defend the insured against any and all lawsuits that the policy applies to. When the insured gets a notification that intimates him of a lawsuit in store, he sends a complaint along with a letter citing the appropriate policies that he is covered under and requesting a defense. The insurer, then, can do any one of these four: defend the insured without reservations, in which case he should defend everything about the lawsuit, even claims that may not be covered by the policy. He can defend with reservations based on rights, in which case if the claims are not covered by the policy, the insurer can withdraw from defending the insured after intimating him via a letter. He can also get a court to rule that it doesn’t have to defend, in which case it should get a declaratory relief from the court; refuse to defend, in which case it can just decline if confident that the claim is not covered by the policy.
• The second duty to indemnify which entails the insurer to pay the insured for everything that he is held liable. The duty to indemnify applies to only those claims that are covered by the policy.
• The third is to settle reasonable claims in instances where the insured makes a settlement offer, or the insurer is aware that the insured would prefer a settlement offer.

If an insurer does not fulfill these duties, he will be liable for breach of contract and might be required to pay up for damages the insured claims.

How can a liability insurance, or to be more specific, a general liability insurance (GLI) protect you as a business owner?
First of all, as we’ve already seen, the whole idea of a liability insurance is to protect one from lawsuits arising due to third-party grievances that include physical, property and personal injury or damage. As a business owner, it is likely that your liability insurance is in combination with a property insurance which is called a Business Owners Policy or BOP. However, that needn’t always be the case. As a business owner, it is imperative that you ensure yourself against liabilities if you do not want an employee’s bodily injury dragging your business under. In certain cases, you can require your employees to have a general liability before they work for you. If you’re a contractor and not a business owner, you would not need a BOP. A general liability insurance would do. Your liability insurance varies in cost based on different factors which include the type of business you own, the number of employees in your business, the kind of risk involved in the business and the location of your business.

Is there a fixed cost of a liability insurance for your particular kind of business? The answer is no. However, based on sample scenarios it is understood that the annual GLI cost for a sole proprietorship could be about $500 and for a small consulting firm, about $3000 a year.