Liability Insurance (History & Coverage)
Liability Insurance. Liability insurance insures the purchaser (also known as the “insured”) against losses due to liabilities that may arise from legal claims and lawsuits. Most liability insurance policies will define what types of claims are and are covered, and will cover the insured against any liabilities that arise only if they are sued for the type of claim specified. Often the policy also makes the liability insurer responsible for defending the insured when a claim arises.
Since the insurance usually only covers claims made by a third party, liability insurance very rarely issues payment to the insured; usually, the purchaser's liability insurance will directly pay the third party who is making the claim. The third party may also have a different type of insurance that covers the losses suffered by the third party; in this case, the third party's insurance will collect payment from the liability insurance of the first party, on the third party's behalf.
History and Development
Liability insurance started as a form of mutual agreement; individuals or companies that had a common risk would come together and pool funds that any single party could use in the event that they incurred loss due to a specific type of liability. Over time, a system for implementing this type of insurance developed; today's liability insurance system is based around dedicated carriers which offer liability insurance policies for purchase. These carriers are usually for-profit insurance companies.
Insurer's Obligation to Defend
One of the duties outlined by most liability insurance policies is the duty to defend the insured in court. The insurer is only obligated to do so in the event that the claim being made against the insured is covered under the policy. As such, there are two main courses of action an insurer can take when a party they insure attempts to invoke the duty to defend. They can:
- 1. Apply for a declaratory judgment regarding coverage.
- 2. Defend the insured, while either:
- a. Waiving their right to withdraw from defense in the event that it is discovered that the claim is not covered
- b. Reserving their right to withdraw
The insurer may also choose not to act, but this is rare because of the consequences should it later be determined that the insurer's duty to defend did apply.
Duty To Indemnify
The second primary duty imposed on the insurer by most liability insurance policies is the duty to indemnify. This means the insurer must pay any amount the insured is held liable for because of a claim that is covered. Limits and deductibles on this amount can be imposed by the specifics of the policy.
Written By: Ethan Kosmin on 07/15/2015
- "Insurer's Duty to Defend Its Insureds - FindLaw.", FindLaw. Thomson Reuters, 2016. Web. 05 Mar. 2016. https://corporate.findlaw.com/corporate-governance/insurer-s-duty-to-defend-its-insureds.html.
- Seaman, Scott M., and Jason R. Schulze. Allocation of Losses in Complex Insurance Coverage Claims. N.p.: n.p., n.d. Print.
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Get useful tips and information about how much commercial insurance costs, small business risks and exposures, how insurance regulations effect your businesses' and detailed descriptions of coverages and exclusions and more. Most small businesses need to buy the following four types of insurance at a minimum to cover their operations from every day risks:
Property Insurance: This policy covers a business if the property used in the business is damaged or stolen as the result of common perils like fire or theft. Commercial property insurance covers the buildings, structures and also business personal property - which includes furniture, inventory, raw materials, machinery, computers and other items.
Liability Insurance: Any company can be sued. Slip-and fall lawsuits are very common and be costly. Customers can claim you injured them or damaged their property - and lawsuits are very expensive. Commercial liability insurance pays damages and can include attorney's fees and other legal expenses. It also ca pay for the medical bills of injured third parties
Commercial Auto Insurance: For vehicles owned by the business. Commercial auto insurance pays bodily injury or property damage costs for which the business is found liable - up the the policy limits for liability and property damage.
Workers Compensation Insurance: In almost every state employers must provide workers comp when there are W2 employees. Workers compensation pays for the medical care of employees and can replace a portion of lost wages - regardless of who was at fault for the injuries.