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Liability insurance—also called “third-party insurance”—protects you against claims, including legal costs and any payouts, resulting from injuries and damage to people or property caused by you, by your actions, or even on property you own. Intentional damage, contractual liabilities, and criminal prosecution are generally not covered in liability policies.

Types

Different types of liability coverage can be added to or bundled with other insurance policies, or they may be a part of a more comprehensive policy. Here are the most common types of liability insurance and what they cover:

  • Employer’s liability and workers' compensation protects a business against liabilities (i.e. costs) arising from injuries or the death of an employee incurred at the business.
  • Product liability is held by businesses that manufacture products for sale and protects against lawsuits arising from injury or death caused by those products.
  • Indemnity insurance protects a business against negligence claims of financial harm from the business’s mistakes or failure to perform.
  • Commercial liability insurance, also known as “comprehensive general liability insurance,” provides insurance coverage for lawsuits arising from injury to employees and the public, property damage caused by an employee, and injuries resulting from negligent action of employees. This type of policy could also cover infringement on intellectual property, slander, libel, contractual liability, tenant liability, and employment practices liability.
  • Comprehensive general liability (CGL) policies are tailor-made for businesses, partnerships, corporations, associations, and other organizations. This type of liability coverage includes bodily injury, property damage, personal and advertising injury, medical payments, and premises and operations liability.
  • Personal liability insurance is also a thing! It is considered a secondary policy, which means it will pay out once limits on other policies—like home or auto insurance—have been reached.
  • Umbrella liability policies are personal liability policies that protect against catastrophic losses. They kick in when the liability limits of other insurance policies are reached.

Who needs liability insurance

From the list above, it may seem that mostly businesses need liability insurance, but individuals can benefit from it too. High-net-worth individuals, or those who have sizable assets they might lose if sued, should carry personal liability insurance. It’s recommended that anyone with a net worth beyond the combined coverage limits of other personal insurance policies, such as home and auto coverage, also have personal liability coverage.

Other individuals who should protect their assets (large, medium, or small) include landlords—even if you’re only renting out a bedroom, or part of your basement. If you have a secondary seasonal home—like a beach cottage—that you regularly let friends use or invite over to stay with you, or if you have friends use your boat or other recreational vehicle. And finally, 49 of the 50 states (as well as D.C.) require drivers to have some form of liability insurance coverage as part of their auto insurance in case they are found liable for causing an accident, injury, or damage to property.