INTRODUCTION Liability insurance is a part of the general insurance system of risk financing to protect the purchaser (the "insured

") from the risks of liabilities imposed by lawsuits and similar claims. It protects the insured in the event he or she is sued for claims that come within the coverage of the insurance policy. Originally, individuals or companies that faced a common peril, formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium. Liability insurance is designed to offer specific protection against third party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made,[1] the insurance carrier has the duty (and right) to defend the insured. The legal costs of a defense normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defense costs tend to soar when cases go to trial.

What liability insurance provides
Liability insurers have two (or three, in some jurisdictions) major duties: 1) the duty to defend, 2) the duty to indemnify and (in some jurisdictions), 3) the duty to settle a reasonably clear claim. To defend The duty to defend is triggered when the insured is sued and in turn "tenders" defense of the claim to its liability insurer. Usually this is done by sending a copy of the complaint along with a cover letter referencing the relevant insurance policy or policies and demanding an immediate defense. At this point, the insurer has three options, to:(1) seek a declaratory judgment of no coverage; (2) defend; or (3) refuse either to defend or to seek a declaratory judgment.[2] If a declaratory judgment is sought, the issue of the insurer's duty to defend will be resolved. If the insurer decides to defend, it has thus either waived its defense of no coverage (later stopped), or it must defend under a reservation of rights. The latter means that the insurer reserves the right to withdraw from defending in the event that it

and to recover from the insured any funds expended to date. If the insurer chooses to defend.turns out the claim is not covered. the duty to defend obligates the insurance company to settle reasonably clear claims. would have settled the claim. and the case goes to trial. To avoid endangering an insured to gain a remote possibility of avoiding paying on the policy. The standard judicial test is that an insurer must settle a claim if a reasonable insurer. or its insured wins. the plaintiff might then attempt to recover the difference between the policy limits and the actual judgment by obtaining writs of attachment or execution against the insured's assets. if the insurer refuses to settle. the insurer has an incentive not to settle. there is a third duty. The duty is of greatest import during situations in which the settlement demand equals or exceeds the policy limits.) To indemnify The duty to indemnify means the duty to pay "all sums" for which the insured is held liable. the duty to settle a reasonably clear claim against the insured. Effects of breach An insurer who breaches any of these three duties may be held liable for the tort of insurance bad faith in addition to breach of contract. it may either defend the claim with its own inhouse lawyers (where allowed). notwithstanding any policy limits. The company has incentive not to settle since if the case goes to trial. This is where the duty to settle comes in. since if it settles. leaving the insurer with no liability. In turn. there are only two possibilities: its insured loses and insurer pays the policy limits (nothing gained nothing lost).    . To settle reasonable claims In some jurisdictions. In that case. or give the claim to an outside law firm on a "panel" of preferred firms which have negotiated a standard fee schedule with the insurer in exchange for a regular flow of work. (So. insurers often prefer to defend under a reservation of rights rather than simply do nothing. The choice to do nothing can be very risky because a later determination that the duty applied often leads to the tort of bad faith. But. The decision to defend under a reservation of rights must be undertaken with extreme caution in jurisdictions where the insured has a right to Cumis counsel. it will certainly pay the policy limit. the insured might be held liable for a sum far exceeding the settlement offer. up to a set policy limit. But this interest is at odds with the interest of its insured.

First. In other words. The insurance industry reacted in two ways to these developments. meaning that the insurer agreed to defend and indemnify against any loss which allegedly "occurred" as a result of an act or omission of the insured during the policy period. This was originally not a problem because it was thought that insureds' tort liability was predictably limited by doctrines like proximate cause and statutes of limitations. (There is usually a 30-day grace period for reporting after the end of the policy period to protect insureds who are sued at the very end of the policy period. A related variation is the claims-made-and-reported policy. They also force insureds to become more proactive about risk management and finding ways to control their own long-tail liability. This puts insureds to a Sophie's choice. where the policy covers only those claims that are first "made" against the insured during the policy period. claims-made policies[edit] Traditionally. Claims-made policies often include strict clauses that require insureds to report even potential claims and that combine an entire series of related acts into a single claim. or 40 years earlier now found that their insureds were being hit with hundreds of thousands of lawsuits which implicated those old policies. In the 1980s. and thereby protect their right to coverage. to close their books on policies and record a profit. but at the . every slip-and-fall on their premises).e. a large number of major toxic tort scandals (primarily involving asbestos and diethylstilbestrol) resulted in numerous judicial decisions and statutes which radically extended the so-called "long tail" of potential liability chasing occurrence policies. the industry began issuing claims-made policies. liability insurance was written on an occurrence basis. premiums on new occurrence policies skyrocketed. 30. since the industry had learned the hard way to assume the worst as to those policies. The result was that insurers who had long-ago closed their books on policies written 20.) Claims-made policies enable insurers to again sharply limit their own long-term liability on each policy and in turn. even if those never ripen into actual lawsuits. They can timely report every "potential" claim (i. because the risk of dismissal was so obvious. claims-made policies shift the burden to insureds to immediately report new claims to insurers. Hence. Second.. they are much more affordable than occurrence policies and are very popular for that reason. Of course. it was thought that no sane plaintiffs' lawyer would sue in 1978 for a tortious act that allegedly occurred in 1953.Occurrence v. under which the policy covers only those claims that are first made against the insured and reported by the insured to the insurer during the policy period.

With such policies. constructors and those who offer employment. Such policies fall into three main classes: . 'first dollar' defense" (subject. The reason for such laws is that the classes of insured are deliberately engaging in activities that put others at risk of injury or loss. The California Courts of Appeal have held that primary insurers on policies with a SIR must still provide an "immediate. to their right to later recover the SIR amount from the insured) unless the policy expressly imposes exhaustion of the SIR as a precondition to the duty to defend. the insured is essentially agreeing to self-insure and self-defend for smaller claims. there are a further range of perils that people insure against and. Retained limits and SIRs[edit] One way for businesses to cut down their liability insurance premiums is to negotiate a policy with a retained limit or self-insured retention (SIR). if their activities do cause loss or damage to another. but then they run the risk that the claim will be denied because it should have been reported back when the underlying accident first occurred. those who manufacture products that may be harmful. Claims-made coverage also makes it harder for insureds to switch insurers. However. and to tender only for liability claims that exceed a certain number. since the insurer is being asked to re-assume the kind of liabilities which claims-made policies were supposed to push to insureds to begin with. In addition. those who offer professional services to the public. which is somewhat like a deductible. of course.[3] Types of liability insurance In many countries. the number and range of liability policies has increased in line with the rise of contingency fee litigation offered by lawyers (sometimes on a class action basis). money will be available to pay compensation. It is possible to purchase "tail coverage" for such situations. but only at premiums much higher than for conventional claims-made policies. liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for negligence. The most usual classes of mandatory policy cover the drivers of vehicles.expense of making themselves look more risky and driving up their own insurance premiums. consequently. writing such insurance is itself risky for insurers. Public policy therefore requires that such individuals should carry insurance so that. as well as to wind up and shut down their operations. Or they can wait until they actually get sued.

pubs. most organizations include public liability insurance in their insurance portfolio even though the conditions. etc. markets. sporting venues. hotels and resorts. trespassers. if litigated. may buy pollution insurance to cover lawsuits resulting from environmental accidents. Regardless of compulsion. theaters. For example. and warranties included within the standard policies can be a burden. It varies from state to state as to whether either or both employer's liability insurance and public liability insurance have been made compulsory by law. a rotten branch may fall from an old tree and injure a pedestrian. Certain industries such as security and cleaning are considered high risk by underwriters. Those with the greatest public liability risk exposure are occupiers of premises where large numbers of third parties frequent at leisure including shopping centers. and. A company owning an industrial facility. how much coverage is appropriate and cost-effective. Private individuals also occupy land and engage in potentially dangerous activities. in the event of a claim. are made by way of civil actions in the relevant jurisdiction. The risk increases dramatically when consumption of alcohol and sporting events are included. out-of-pocket costs for a legal defense or settlement can far exceed premium costs. In some cases. In many countries claims are dealt with under common law principles established through a long history of case law and. for instance. who may be physically injured or whose property may be damaged or both). clubs. . visitors. however. However. Many small businesses do not secure general or professional liability insurance due to the high cost of premiums. the costs of a claim could be enough to shut down a small business. The majority of states require motorists to carry insurance and criminalise those who drive without a valid policy. In some cases underwriters even refuse to insure the liability of these industries or choose to apply a large deductible in order to minimize the potential compensations.Public liability Industry and commerce are based on a range of processes and activities that have the potential to affect third parties (members of the public. and many people ride bicycles and skateboards in public places. Many also require insurance companies to provide a default fund to offer compensation to those physically injured in accidents where the driver did not have a valid policy. exclusions. if so. Businesses must consider all potential risk exposures when deciding whether liability insurance is needed. sub-contractors.

smaller organizations are often driven into bankruptcy when faced by claims not covered by insurance. The scale of potential liability is illustrated by cases such as those involving Mercedes-Benz for unstable vehicles and Perrier for benzene contamination. mechanical and electrical products. but legislation such as the UK Consumer Protection Act 1987 and the EC Directive on Product Liability (25/7/85) require those manufacturing or supplying goods to carry some form of product liability insurance. tobacco.[4] Workers' Compensation insurance in the United Statesis usually compulsory unless the employer can demonstrate the capability to selfinsure by demonstrating sufficient financial capacity and risk management capabilities. The National Council on Compensation Insurance (NCCI) and various state rating bureaus provide similar support for Workers' Compensation. food contamination. agricultural products and equipment. In the 1980s. and all other major product classes. separate policy forms are generated to underwrite Commercial General Liability policy Workers' Compensation. workers' comp insurance is regulated and underwritten separately from liability insurance. Note that in the United Kingdom Employers Liability Insurance is compulsory. In many states in the US. but the full list covers pharmaceuticals and medical devices. In those countries where such insurance is not compulsory. asbestos. usually as part of a combined liability policy. recreational equipment. or require the insured either to take reasonable precautions or to comply with current legislation and regulations. the insurers are prohibited from including conditions within their policies that seek to impose any unreasonable conditions precedent to liability. That is.Product Product liability insurance is not a compulsory class of insurance in all countries. the standard CGL forms were revised to exclude coverage for torts related to the employer-employee relationship like racial or gender discrimination . Workers' compensation in the United States in most states operates through administrative adjudication outside of the federal and state courts. Employers that self-insure may carry excess insurance for occurrences that generate unacceptably large losses for the employer. chemicals and pesticides. in turn. Since 1971 ISO has assisted the insurance industry in developing policy forms for Commercial General Liability. Employers[edit] New policies have been developed to cover any liability that might be imposed on an employer if an employee is injured in the course of his or her employment. unless the only employee is the owner of the company (who holds at least 50% of the shares) or the business is a family business which is not incorporated as a limited company.

. In the United States. by allowing criminals to insure themselves from adverse consequences of their own actions. This is usually mandated either by the policy language itself or case law or statutes in the jurisdiction where the insured resides or does business. from obtaining liability insurance to cover the costs of defending themselves in criminal actions brought by the state or civil actions brought by their victims. A contrary rule would encourage the commission of crime. as well as liability for negligent supervision of midlevel managers who committed such torts. In other the workplace. if your car is hit by someone without insurance. General liability Many of the public and product liability risks are often covered together under a general liability policy. third-party insurance. or standard. it is possible to obtain loss insurance to compensate one's losses as the victim of a crime. liability insurance. In contrast to liability insurance. liability insurance does not protect against liability resulting from crimes or intentional torts committed by the insured. particularly organized crime. For example. it soon became obvious that employers were anxious to find some kind of liability coverage for such torts. general liability insurance coverage most often appears in the Commercial General Liability policies obtained by businesses. on their behalf. It should be noted that crime is not uninsurable per se. Insurable risks Generally. These risks may include bodily injury or property damage caused by direct or indirect actions of the insured. and allow insurance companies to indirectly profit from it. which resulted in the development of Employment Practices Liability (EPL) insurance. This is intended to prevent criminals. but not any tort or crime with a higher level of mens rea. It is purchased by the insured (the first party) from an insurance company (the second party) for protection against damage from the actions of another party (a third party). and in homeowners' insurance policies obtained by individual homeowners. However. Third-party liability Third-party liability is an insurance policy purchased for protection against the actions of another (a third) party. you can purchase coverage. which would be covered by first-party. liability insurance covers only the risk of being sued for negligence or strict liability torts. This is not to be confused with an accident you caused.

software or system failure. There are two exceptions to this rule: 1. Typically. some definitions of legal liability may still be evolving in this field. most states make only the carrying of auto insurance mandatory. although the policies are not normally information given to the jury. or personal injury on your businesses premises or arising from your operations [5] Evidentiary rules regarding liability insurance In the United States. the existence of the policy can be introduced to show this motive or bias.Having the right general liability insurance coverage will protect your business in case it is ever sued or legally held responsible for some injury or damage. because thecourts do not want to discourage parties from carrying such insurance. Covered incidents may include errors and omissions that result in the loss of client data. 2. property damage. negligent . Federal rules of civil procedure rule 26 was amended in 1993 to require that any insurance policy that may pay or may reimburse be made available for photocopying by the opposing litigants. The Cornell University Legal Institute web site includes congressional notes. General Liability will pay losses arising from real or alleged bodily injury. Federal Rules of Appellate Procedure rule 46 says that an appeal can be dismissed or affirmed if counsel does not update their notice of appearance to acknowledge insurance. If a witness has an interest in the policy that gives the witness a motive or bias with respect to specific testimony. Where the carrying of a policy is not mandatory and a third party makes a claim for injuries suffered. evidence that a party has liability insurance is generally inadmissible in a lawsuit on public policy grounds. Technology firms must carefully read and fully understand their policy limits to ensure coverage of all potential risks inherent in their work. If the owner of the insurance policy disputes ownership or control of the property. claims of non-performance. Liability insurance and the technology industry Because technology companies represent a relatively new industry that deals largely with intangible yet highly valuable data. evidence of liability insurance can be introduced to show that it is likely that the owner of the policy probably does own or control the property. professional liability insurance protects technology firms from litigation resulting from charges of professional negligence or failure to perform professional duties.

within policy limits. contents of a forum post or email of an employee that are incorrect or cause harm to a reputation. client contracts often require technology subcontractors working onsite to provide proof of general liability and professional liability insurance. • Classes of legal wrong – Crime – Breach of contract . getting rid of office equipment such as fax machines without properly clearing their internal memory. Liability Insurance • Product Liability • Professional Liability • Arises if there is a violation of a person’s legal rights or a failure to perform legal duty owed to certain person or to society as a whole. For example.overselling of services. Additionally. some client companies have won large settlements after technology subcontractors’ actions resulted in the loss of irreplaceable data. or failing to notify customers that their private data has been breached. Professional liability insurance would generally cover such settlements and legal defense.