Insurance has emerged as a risk management tool to prevent against risks arising from any unanticipated event. Insurance coverage is available in many forms and for almost every type of contingency. We frequently hear about car, medical and life insurance. Another form of insurance is liability insurance. This kind of insurance protects the policy holder from claims that may arise from lawsuits or from any other form of legal action. Such insurance policy contains specific clauses as to what kind of law suit will be covered and to what extent compensation will be paid.

It helps in protection from claims that may be filed by third parties. Here, the sum is not paid to the insured but to the party who has filed the claim or in other terms, who has suffered the loss.

Any act done intentionally resulting in loss to a third party generally falls outside the scope of liability insurance clauses. Insurance provider has to take necessary steps to act on behalf of the insured as and when a claim is filed.

Let Us Understand The Types Of Liability Insurance:

Product Liability Insurance:

This kind of insurance is designed to protect from liabilities that may arise from claims filed in relation to manufacture or sales of goods to general public. Any injury or loss to a buyer caused on account of usage of the product can result in such claims. A defective product produced as a result of a flaw in the production process can also result in a situation of legal action against the company. Any hazardous product with dangerous contents sold without any warning as a result of which any damage or injury is caused to the customer, may put company at severe risk. A company can face severe penalties in form of damages. There have been situations where businesses have to close down on account of heavy charges imposed by courts. Damages imposed may range form medical costs incurred or to be incurred on the treatment, compensation, legal fees, filing fees, and punitive damages. It is important to clarify with the insurance company as to what kind of coverage the policy will provide in case of any claim.

Public Liability Insurance:

A company whose production process is such that it causes air pollution or disposal of waste material in nearby sea, is required to comply with various laws and regulations enforced by government authorities from time to time. It is their duty to take appropriate steps to ensure that no damage is done to the nature, nearby living societies and their properties. Various environmental protection acts have also been enforced which makes it mandatory for companies to comply defined norms before they can undertake any activity that can cause harm to public in general. Take another situation, whereby a company is using a rental property for its commercial purposes. The owner can file a claim against the company if any damage is done to the property that may have resulted from such a business activity. Trucks with heavy load of raw materials can frequently destroy roads meant for general public transportation which may cause accidents or injuries. To ensure that such issues do not result in disruption of business operations, many companies prefer to obtain public liability insurance, specific to their requirements. Public liability insurance is generally mandatory in most of the countries.

Employer’s Liability Insurance:

Employees are the most important asset of an organization. They represent the intellectual capital of any company. Their safety and security should be one of the most important concerns for any business. Today many organizations provide trainings on how to manage situations in case of terrorist attacks, problems caused by natural disasters, fire and other accidents resulting from any human action and so on. Production processes of many manufacturing companies involve complex operations. Many times we read in newspapers that so many human casualties took place as a result of unhealthy business procedures. Simply educating employees on possible hazards will not completely eliminate the risk. Companies as an extra measure obtain employer’s insurance policies whereby they can take help of insurance companies to pay for the compensation.

Director’s and Officer’s Liability Insurance:

The main objective behind this kind of insurance policy is to compensate the directors and officers of the company for losses resulting from their actions in the normal course of business. Insurance policy can also be taken to cover the liabilities associated with the company. Any decision taken by the management has an overall impact on the functioning of the business. A decision which results in erosion of shareholder’s wealth can attract lawsuits from all directions. But this does not mean that any intentional illegal act can be covered by such a policy. This policy would in general, cover errors and omissions which normally represent unintentional acts of any individual.

Professional Liability Insurance:

Also known as professional indemnity insurance is intended to protect from liabilities arising out of professional services. Professionals like accountants, management consultants, doctors, lawyers, contractors, designers, information technology professionals, engineers and so on. Professional liability can arise on account of negligence, incorrect advice, and breach of terms of agreement with the client and so on.  For instance, a company hires a group of software consultants for developing software considering their reputation in the industry. These consultants work with due diligence in providing services to this company. After completion of services company files a claim for incomplete services as per the agreement that was laid down. As a part of the agreement, these consultants were required to provide support technical support to the company for a period of six months from the date of expiry of contract. However they failed to do so as an act of negligence. In the absence of professional indemnity insurance, they will be liable to pay damages to the company to the extent court finds they are responsible for the damage.

Liability insurance, be it of any kind generally excludes damages resulting from frauds, intentionally committed misrepresentations, acts performed to gain personally from any transaction, act or activity. Any motive to save premium on insurance policies can sometimes result in far adverse consequences.