What is Liability Insurance?

Share Me!

Liability insurance helps protect the insured (the one who purchases the liability insurance) from the burden of claims that can arise and cause you major legal issues. You have a liability issue when you cause damage (financial or otherwise) to a third-party due to your negligence. This could be from an auto accident, a guest getting seriously injured on your property and libel and slander cases too. Once the decision has been made by the authorities that you are guilty of negligence, the affected third-party has all the right in the world to take you to court and sue you for their losses.

The concept of what is liability insurance originates from a handful of companies joining together and pooling their money in for a self-fund that would be available in case of a liability claim made against one of these companies. Nowadays, insurance companies offer this service by protecting the insured against any claims made by the affected third-party. However, it is important to know what claims are actually covered under your liability insurance policy.

When it comes time for the payout of a liability claim, the insurance company does not pay the insured. The insurance company pays the third-party and their representation directly. However, this is not always how payouts from the insurance company work. Let’s say, you are the insured and your water heater leaks overnight and floods your basement. In this case, there is no third party and the insurance company would write you a check directly (the insured). So, rather than being the norm, this example is an exception to the rule.

 

Understanding General Liability Insurance

 

Below are some typical coverage provided by General Liability Insurance:

Typical Coverage with General Liability Insurance

  1. Premises, Operations and Activities
  2. Products and Completed Operations
  3. Owners and Contractors Protective
  4. Contractual Liability
  5. Personal Injury & Advertising Injury
  6. Damage To Premises Rented To You
  7. Medical Payments

Now that you know what liability insurance is, it is important to know that liability insurance can help defend you against claims in a court of law and may even result in clearing you from possible negligence altogether. The insurance company also fights to mediate the terms and settle claims, where applicable.

Generally, a liability insurance is useful in the following circumstances:

Liability Insurance is Useful In:

  1. A car accident, hitting another car
  2. A car accident, causing damage to the property
  3. A car accident, hitting another person
  4. Physical injury caused to another person
  5. Libel and slander cases
  6. Copyright Infringements

Liability insurance is serious business and definitely not something to be ignored. Different types of liability insurance may cover you and your personal assets. There is also general liability for commercial businesses too. If you or your business is at fault, liability costs are likely to be paid out and a liability insurance can help you avoid serious repercussions. So if you don’t have liability insurance already, just Google search “liability insurance [your area code]“. This will list the most popular insurance companies available in your area. Alternatively, you can just search for the top liability insurance agencies in this article itself or within this website and get an online quote. For more details about liability insurance, please keep on reading my post below.

However, do note reviews posted by previous customers and not just the testimonials on the company’s website. Reviews will give you precious information of any loopholes within a particular insurance company and will guide you in the right direction.

 

Certificate of Liability Insurance

 

A certificate of liability insurance is a legally binding insurance document that mentions briefly the coverages of the insured’s policy. All parties that are mentioned as “named insured” are covered in the insurance policy and are holders of the certificate of liability insurance. This certificate can be requested by any client that may be looking for a Joint Venture (JV) with your business prior to signing a contract. Since all important details that may be required by the client are available within this document, it is very handy to have one available.

While the certificate of liability insurance acts as the immediate proof of insurance, it is not the actual insured insurance policy. It simply provides a summary of a company’s insurance coverages and therefore includes a disclaimer that is merely information.

Important Information Covered in a Certificate of Liability Insurance

  • Policy limits of liability coverage
  • Key areas of coverage
  • Policy expiration date
  • Deductible
  • Contact information for insurance representatives
  • Names of any additional parties covered
  • Policy limits of liability on Business Personal Property (BPP)

You can easily search for a sample certificate for your company (or any other company) online via a Google search. You will usually be provided with the he certificate of the insurance policy upon purchase, but this can also be requested from your insurance company at a later date. Alternatively, your insurance company, in most cases, provides a service where they send the certificate directly to the third-party that you are dealing with. This further certifies the authenticity of the certificate. Call your agent or your insurance company in case of any queries. If you are the party requesting the certificate of liability insurance, you can also call the insurance agent and verify the certificate.

Who Can Ask for a Certificate of Liability Insurance?

  • A person looking to have a joint venture
  • A person looking to sign a contract with your company
  • The Authorities
  • Banks and other financial institutions

You can find detailed information about certificate of liability insurance at the link here: Certificate of Insurance – StateFarm.

 

What Does Liability Insurance Cover?

 

This is a difficult yet very simple question to answer. Let’s see why?

What does liability insurance cover? Well, the question what does liability insurance cover can simply be answered as whatever you can legally be held responsible for. While general liability insurances can cover a lot of events whereby you may have been the cause of somebody’s loss or injury, there are other liability insurances designed for specific matters. Here we discuss the several most common types of liability insurances that most businesses have to have in their insurance portfolios.

Types of Liability Insurance:

  1. General Liability Insurance
  2. Property Insurance
  3. Auto Insurance
  4. Worker’s Compensation
  5. Cyber Insurance

General Liability Insurance

This covers most of the events that have brought damage or loss to a third party by the actions of your employees or your products or services.

Property Insurance

Most commonly covers events that include disasters such as fire, theft, vandalism, etc. Sometimes damages to the premises can bring a halt to business operations and while the building suffers the financial impact, the hiatus of the business also causes a loss of revenue. For such cases, there is also the business interruption / loss of earning insurance which can be added.

Auto Insurance

Quite simply, this protects your cars, SUVs, vans and trucks from damage and collisions. Sometimes in a business, this may also be applicable for non-company cars (personal cars used by employees). Most importantly, having auto insurance is compulsory in every US state, except for New Hampshire.

Worker’s Compensation

If an employee is injured or harmed at work and legally files a suit against the company for negligence, then, this compensation helps cover the costs for the case and the compensation to the employee, etc. Therefore, it is of utmost importance since it protects the business (and you) from legal complications. This coverage is also required of businesses by more than half of the US states labor laws.

Cyber Insurance

Insurance against data breaches, extortion on leverage of sensitive information, etc.

There are various types of liability insurances that we will cover in the post below. In business, professional liability insurance is fundamental.

 

Professional Liability Insurance

Just like general insurance policies, a professional liability insurance policy can make payments for the insured if they are ever sued due to “errors” and “omissions” claims in their business practice. It is particularly tailored for professionals who provide advice or a service to their clients and protects them against any legal complaints or claims for damages occurring due to the act, omission or breach of professional duty in the course of business.

The insurance must not only cover the business but also the employee, director, or partner while they are performing work within the scope of their duties.

Different Types of Common Professional Liability Insurance:

  1. Medical Malpractice
  2. Employer’s Practice Liability Insurance (EPLI)
  3. Director’s and Officer’s (D&O)
  4. Errors and Omissions (E&O)

Some of the popular and well established companies offering great packages of professional liability insurance include:

One of the most important factors in choosing between companies is the limits of the insurance package they offer. Deciding on the limit is a confusing task. So, how are you going to make a decision on this? You need to use a risk-based approach and understand that the limit must be high enough to easily cover any potential losses, but also low enough to accompany affordable premiums. I will shed some light on the important factors for you to consider when choosing a Professional Liability Insurance.

Important Factors to Consider When Choosing Professional Liability Insurance Packages:

  1. What kinds of claims have been made against your competitors?
  2. What is the probability of such claims happening against you and what would be the appropriate remuneration?
  3. How long does a typical case (similar to the one possible against you) last in court?
  4. Public liabilities (if included) can attract large amounts of compensations.
  5. What group (age, education, background) of people is more likely to be affected and make a claim against you?

 

Cyber Liability Insurance

Simply imagine or maybe you actually do have an online business and hopefully have a lot of customers signing up and purchasing your products and services. This means that you are in possession of sensitive data (including legal names, addresses, credit card numbers, social security numbers, images etc.) of your customers. However, in case of a cyber-attack, some unholy hacker will have broken into your computer mainframe defense systems and hacked into your network and the data it holds. Now, all that sensitive information is at significant risk and you are liable for the loss of your customer’s confidential information. Cyber liability insurance covers such types of issues, faults and liabilities.

Data breaches are now part of life and must be accepted like any other fact. This isn’t just the case for the larger multinational companies. Even the smaller local companies get their data breached and understandably more frequently than the larger e-business companies. This is simply due to the fact that the small businesses do not allocate a large sum of money to their online security. Cyber liability insurance can cover a range of liabilities including the most popular breach of data. They may also cover Multimedia / Media liability like the destruction of a website or the online image of the business. Sometimes the hackers would exploit and extort the affected business. Some policies of cyber liability insurance also cover such extortions and the professional fees associated with such cases.

I have listed below the top 5 reasons why your business needs cyber liability insurance.

  1. Cyber-crime is the most quickly spreading crime in the world.
  2. Sensitive data of your clients or third party is valuable and you can be held accountable for damages (e.g. Severe penalties if you lose credit card data)
  3. Your reputation is everything. Protect it.
  4. Portable devices increases the risk.
  5. Not just big businesses are being targeted, but lots of small business too.

Credit card crime alone is worth over $7.5 billion! For 2013, an analysis of just 140 claims of cyber liability showed the top 2 causes of loss were due to: 1. lost / stolen laptops (or other electronic devices) and, 2. hackers. The other causes of loss are illustrated by percentage in the pie chart.

percentage of claims by cause of loss

A lot of big insurance companies offer cyber liability insurance including AIG with its CyberEdge ® package. This package, like most others, basically covers third party data loss occurring from data breach, threats to disclose data (extortion money), online defamation & copyright trademark infringement, and also direct first-party costs.

Another popular package is the LIU DataPro Insure ™ by Liberty International Underwriters. You can search for the best packages online according to your business size, the nature of data you are holding, and by the number of customers that trust your online system.

Liquor Liability Insurance

Any organization that sells, serves, or assists in the purchase or use of liquor, must do so responsibly. Serving or selling alcohol to customers puts these companies at risk of a potential liability claim as a consequence of someone getting drunk to the extent of injuries or property damage. Any company or establishment that earns capital by service or sale of alcohol (including beer and wine) requires a special coverage for Liquor Liability.

Liquor in the United States is consumed at bars and other establishments daily. A large portion of the alcohol related crimes and damage occurs due to the misbehavior of individuals consuming too much alcohol. The following table shows the general trends and statistics for underage individuals consuming alcoholic beverages in United States.

Underage Drinkers in the United States10.8 million
Individuals practicing heavy drinking before ages 19-200.7
Underage individuals who paid for their own consumption (percentage)0.31
Underage individuals who accepted drinks from unrelated persons (percentage)0.37
Underage individuals who accepted drinks from parents or other guardians (percentage)0.21
Drivers aged 16 to 20 with unacceptable driver licenses (percentage)0.32
Businesses that do not bother to ask for identification, and hence potentially serve alcohol to minors2 out of 3
College students who admitted using fake identification (percentage)0.18

 

Younger people are more prone to be a part of accidents or extreme events that give rise to most of the liquor liability insurance claims for which establishments are held responsible. Students who are underage seek to dodge laws and are the best ones to discover new techniques to get their hands on liquor.

Liquor liability insurance claims are usually made when a customer at an alcoholic servicing or selling establishment has overindulged in alcoholic beverages and lacks the judgment NOT to drive. It is often difficult for an employee of a bar or an establishment to assess / tell when the usual drinking customer has had too much to drink. However, according to the law, it is still the duty and responsibility to serve alcohol responsibly and therefore the businesses can eventually be held accountable for the aftermath of these patrons.

It does not seem fair or appropriate to charge the company instead of the drunk person. But, bear in mind that the liability law for liquor stores has been passed as law in 43 states and are processed as court verdicts in the other states. Most general business insurance packages do NOT include liquor liability. This must be requested separately as an extra clause or policy or bought completely separate from the general insurance. Many clubs and places for rent also recommend their parties to arrange for personal liquor liability insurance.

I have listed some of the common / typical questions that the insurance agent may ask you when applying for a liquor liability insurance.

Typical Questions asked for Liquor Liability Insurance application:

  1. Has any liquor liability claim been filed against you (or your company) in the last 5 year period?
  2. Does the company offer a drive-through sale of alcohol?
  3. Number of peak period alcohol-serving employees/owners (including bartenders and waitresses)
  4. Are the Applicant’s customers permitted to order more than one drink at last call?
  5. Any consumption promotions such as happy hour, ladies night, etc.?
  6. Does Applicant dispense or provide alcoholic beverages for off-premises events?
  7. Type of Customers (most applicable): Families, College Students, Business Professionals, or others.

Dog Liability Insurance

 

Dog liability insurance covers for dog bites especially from dogs that are from the classified “dangerous dog breeds”. It is a type of pet insurance which compensates for events and costs caused from accidental injury or damage originated from your dog. In general, insurance companies classify certain dog breeds as dangerous. Some insurance companies don’t even investigate the breed of a dog before selling a policy, while others may have different policies and special clauses for certain breeds of dogs.

Below, I have listed the top 10 classified dangerous dog breeds:

Ten Classified ‘Dangerous’ Dog Breeds for Dog Liability Insurance:

  1. Pit Bulls & Staffordshire Terriers
  2. Doberman Pinschers
  3. Rottweilers
  4. German Shepherds
  5. Chows
  6. Great Danes
  7. Presa Canarios
  8. Akitas
  9. Alaskan Malamutes
  10. Siberian Huskies

Dog bites were responsible for more than 33% of all homeowners insurance liability claim in 2013. The average cost per claim for compensation of dog bites was $27,862 in 2013 in the United States of America.

Estimated Statistics per annum for U.S. for Dog Liability Insuranc

 
YearNumber of ClaimsAverage cost per claim (USD)
200916,58624,840
201015,77026,166
201116,69529,396
201216,45929,752
201317,35927,862

Dog liability is usually imposed on the owner in three cases.

  1. The dog bites (or causes injury or damage to property) without any stimulus from the affected party.

 

  1. The dog owner knew that the dog was classified (or otherwise) dangerous and was probably going to cause injury or damage. In this case, the affected party i.e. the victim, must prove that the dog owner had previous knowledge of the dog being unsafe and/or unstable.

 

  1. The dog owner showed negligence and carelessness which led to the damage or injury caused by the dog. The owner must be able to control the dog in certain public situations and therefore automatically assumes the responsibility and duty to protect the general public (and their property) from any harm likely to be caused by the pet.

Typically, the insurance companies cover damages up to $100,000 (some dog liability insurance contracts can go up to $300,000 as well). Any amount claimed and legally binding above the limit must be paid by the dog owner himself/herself. Many contracts include clauses where the premium amounts also go up when an incident occurs. A dog that has bitten once is potentially more dangerous than one that has not. Therefore, the insurance companies tend to increase the premium to the dog owners to compensate for a possible repeat incident (as unfortunate as this can be).

I have listed the most popular companies for pet insurance and these include ASPCA, PetPlan, Embrace, Healthy Paws, PetFirst and many more. When browsing for dog insurance look for certain points in your provider:

  • How much experience does the provider have
  • Does the provider offer wellness coverage
  • Cost of Plan
  • Maximum coverage per bite per incident etc.
  • Reviews

You must also know the history of the dog especially if you inherited it from someone or is a rescue dog. Has your dog ever attacked anyone or shown an aggressive behavior? Has there been a legal complaint against your dog in the past five years? Remember any injury or damage caused by your dog may have repercussions on you and would lead to legal actions and prosecution against you.

 

I hope you have gained valuable information on some of the different types of liability insurance available.

One Day Event Insurance
What Business Liability Insurance Costs Your Business