Liability Insurance

According to a leading global professional services firm, the U.S. tort system, which compensates liability victims, cost $254.7 billion in 2008, or an astonishing $838 for every person in the United States. Moreover, the nonpartisan Congressional Budget Office estimates that, at the state level, the median tort award is $31,000, while at the federal level the median award is $139,000.

These statistics illustrate the importance of liability insurance for a business or individual that covers any potential claims against the business or person. But what is it and how does it protect the business or individual?

Liability insurance is an insurance policy, or contract, that protects an individual or business from liability for an injury, negligence, or malpractice. A certain level of coverage is provided by an insurance company in exchange for payment of a premium. Typically, these policies cover the amount awarded to a third-party who was injured or had incurred property damages and legal costs associated with the claim that the insured is responsible, if the individual or business is found legally liable.

Generally, there are three types of insurance: public liability, product liability, and workers’ compensation insurance. Each is designed to provide specific coverage to an individual or business in the event of a third-party injury or a business or individual’s negligence.

Public Liability Insurance

Public liability protects a business from claims made by a third party who is injured on a business’s property or if the business, or an entity or person on behalf of the business, such as an employee, causes damage to a third party’s personal or real property. This insurance covers the compensatory and economic damages of the injured third party or the third party’s property, as well as covering the costs of legal fees.

Product Liability Insurance

Product liability coverage protects a business against claims by purchasers who suffer injuries and losses from a business’s manufacturing or production flaw, design defects, or defective warnings or instructions on its products or services. It covers medical costs, compensatory damages, economic damages, punitive damages, and legal fees and costs associated with a claim.

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Workers' Compensation Insurance

Workers' compensation protects an employer against claims by employees for a job-related injury, illness, or other damages for which the employer may be responsible. Workers' compensation insurance typically covers an employee's lost wages, medical expenses, or permanent disability. Generally, workers' compensation is administered on a state-by-state basis in which a state administrative agency oversees the workers' compensation system. In most states, workers' compensation is provided by private insurance companies.

For individuals or businesses, insurance — public, product, or workers' compensation insurance—is an important coverage to have in order to protect the individual or businesses' personal and real property against any potential third-party claims for injury or negligence.