We live in an uncertain world, which means having insurance is vital. While there are several common insurance products available in the market, there are also some specific ones tailored for crises. One such product is liability insurance.

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Simply put, liability insurance is a type of general insurance that individuals and legal entities can purchase to protect themselves from legal liability arising from their actions or a breach of the standard of care that causes damage or loss to a third party or their property.

How does liability insurance work?

Liability insurance compensates not only for the damage caused, but also, for any legal costs incurred in defending such lawsuits. Unlike other general liability insurance products wherein the insurers pay the claim amount to the insured themselves, herein the insurer pays the compensation claim to the affected third party (plaintiff) on behalf of the insured (defendant), Mudassir Khalil, Head – Liability Insurance at Digit Insurance, told CNBC-TV18.com.

"In the event of a liability lawsuit filed against the insured, the liability policy insurer first reviews the admissibility of the claim under the policy terms and conditions and then provides for defence costs and compensation if awarded by a court of law or through a mutually agreed settlement is reached between the defendant insured and plaintiff," Khali said.

The liability insurance policy, like any other general insurance policy, is not against the law of the land and does not provide coverage for any illegal or criminal activity or intentional damages committed by the defendant insured.

Why is it required?

Liability insurance is a risk management mechanism that transfers risk from an individual’s personal asset or a legal entity to an insurer, who accepts the risk transfer in exchange for a premium based on the terms and conditions of the liability insurance contract.

"This risk transfer helps insured individuals or legal entities focus more on their core operations and not get tangled up in the time and money it takes to hash out legal suits against them. For example, even if an individual or an entity is not at fault, the plaintiff can sue them and blame them for their bodily injury, property damage, or financial loss," Khalil told CNBC-TV18.com.

The policyholder is well protected when faced with a lawsuit as the insurer brings the best lawyers and strategy to defend the insured to mitigate legal liability as they have experience with the industry and similar past cases.

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What are the different types of liability insurance?

Liability insurance is broadly classified into two major groups, and they are:

Casualty lines

This is a liability insurance product where the primary cause of a claim is third-party bodily injury or third-party property damage.

"This product is further classified into many products with specific liability cover, such as public liability act insurance, public liability industrial insurance, public liability non-industrial insurance, product liability insurance, product recall insurance, product guarantee and financial loss insurance, comprehensive general liability insurance, clinical trials, employee compensation, stevedores' liability, carriers' legal liability, and tour operators' liability," said Khalil.

Financial lines

This liability insurance product is specifically designed to protect the policyholder from any claims made by the plaintiff based on negligence or fault resulting in any financial loss.

This line is also further categorised into management liability or directors' and officers' liability, employment practices liability, professional liability or errors and omissions liability (relevant to medical practitioners, medical establishments, construction projects, architects and engineers, chartered accountants, technology and communication, media, insolvency professionals, investment managers, financial institutions, insurance brokers), public offering of securities insurance or initial public offering liability, mutual fund asset protections, cyber insurance, crime insurance, warranties and indemnity insurance, merger and acquisition liability, and tax opinion liability.

What to keep in mind while availing liability insurance?

All businesses and individuals are exposed to some kind of risk that can result in legal consequences, and one should keep in mind these aspects before buying liability insurance (Compiled by Mudassir Khalil, Digit Insurance):

Nature of operations: Whether the business is hazardous or non-hazardous; how much of an asset or property is exposed to third-party risk.

Asset size or revenue from operations: The larger the amount, the more susceptible the business will be to legal suits and paying higher claims compensation.

Regulatory compliance: Regulatory oversights or an inability to adhere to legal compliance may expose businesses to risk. Hence, check how regulated the business operations are.

Third-party interactions: The number of visitors or footfall received by the business — the likelihood or probability of injury or property damage can be higher if the total footfall a business receives is more.

Assets and turnover of the customers: If a business deals with high net-worth individuals or clientele, the probability of them bringing a lawsuit in case of a third-party incident rises.

Adequate cover: Individuals or legal entities typically buy a policy for 10-25 percent of their asset revenue to protect themselves.

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(Edited by : Shoma Bhattacharjee)

First Published:Feb 21, 2023 6:34 PM IST