Chapter 5

Lecture 5.4: Nature and kinds of

such Public Liability insurance
Liability Insurance
The necessity for insurance today is paramount and this is due to the fact that we live in an
economically uncertain world and one never knows when financial help is required.
Insurance acts as a safety blanket and protects customers from various issues that may arise.
Insurance plans are of various types based on the requirement. The most commonly acquire
policies are Life Insurance policies, Health Insurance Policies, among others.
However, there are other insurance policies that are quite specific in nature and correspond to
certain unique requirements. These types of policies are procured by customers who require
cover only for certain issues and not for generic one’s life and health. One of this is the
Liability Insurance.

Liability Insurance Overview:

Liability insurance is a policy that offers protection to businesses and individuals from risk
that they may be held legally or sued for negligence, malpractice or injury. This insurance
policy protects the insured from legal layouts and costs for which the policyholder is deemed
to be responsible. However, contractual liabilities and intentional damage are usually not
covered as part of this policy.
This policy was originally created by companies or individuals who experienced common
risks and hence created a fund to help pay for each other’s issues regarding this. These
policies offer cover against their party claims as the payment will not be for the insured to the
person who has been affected by the damage caused. In case a claim is made then the policy
provider will have to defend the policyholder.

Why is Liability Insurance Required?

This type of an insurance policy is generally procured by companies or individuals who may
be held liable, legally for injuries or other issues. This especially the case for hospitals,
doctors or even business owners. An example would be, if a product manufacturer sells
products that have been faulty or causes damage to other’s products, then he/she may be sued
for the damages caused. Procuring a liability insurance will cover the manufacturer from
ensuing legal costs.
Liability insurance is one part of the general insurance policy itself under the risk
transference category. In many countries, liability insurance is mandatory especially for
drivers of public transport vehicles. The scope of this form of insurance in India has been
defined by the Public Liability Insurance Act of 1991.

Types of Liability Insurance Plan:

There are number of liability insurance policies available for customers based on their line of
work and requirements. The most common forms of Liability insurance are Public, Product,
Employers and Third-party liability.

 Public Liability Insurance

Although only certain countries have made this type of an insurance mandatory, most
industries, especially those that have an effect on third parties such as visitors, trespassers,
 etc. Regardless of whether it is mandatory or not, most companies procure it so as to avoid
unnecessary risk.
Certain small industries do not procure liability insurance policies as the premium is quite
high, however, in the event of any claims, the legal costs will usually outweigh the
premium costs. Therefore, procuring this policy is usually more prudent. This risk
increases exponentially when these locations are shopping centres, theatres, clubs etc and
areas where sporting events are held and places that allow consumption of alcohol.
In cases where the risk is extremely high, policy providers either refuse to insure these
liabilities or charge an exorbitant premium.

 Product Liability
This is again not a compulsory insurance requirement in many countries, but it is highly
important. This is procured by companies whose products are widely used such as
chemicals, tobacco, medical products, food, recreational products and others.

 Employer Liability
This type offers cover to liabilities that an employer may incur if an employee is injured
during his/her employment due to the job. Sometimes, companies do not deem this as
important but if faced with a claim, they might be driven to bankruptcy.

 Third-Party Liability
This policy covers damages caused by the insured to another. The insured is considered as
the first party, the insurance company is the second and the third is the injured or the
person/company making the claims.

How is the Premium Amount Decided?

The premium that is to be paid by the insured will be worked out using the base rate based
on the insurance company’s needs and assessments. Another factor that is taken into
consideration is the amount of risk that the company and its products come with. Higher
the risk, higher is the premium to be paid.
Claim history, size of the risk and the company’s approach to the risk are additional
factors.
While deciding the premium amount, insurance companies take into consideration the
environment, number of claims made previously and their business record.

Companies Providing Liability Insurance Policy are:

There are a number of companies within India that provide different forms of liability
insurance covers. Some of these are -
1. HDFC Ergo Commercial General Liability - this insurance policy provides
protection against claims of property damage or bodily injury for which the
company is liable.
2. ICICI Lombard offers numerous liabilities insurance covers to suit business
requirements.
3. Bharti AXA Commercial General Liability Policy offers cover for liabilities that
are a result of business processes and operations.

Liability Insurance Claim Process:

The claims process varies from one company to the other. There is generally a form to be
filled for the same post which all necessary documents will have to be provided. However,
when it comes to liabilities it is not as simple. There may be court cases or an out-of-court
settlement. The claims process will be different based on what the claim is being made for.

Public Liability Insurance

Public liability insurance is basically an insurance that provides insurance cover to a business
owner against the payment of compensation for any kind of injury or damage suffered by the
member of the public (or a third party) due to normal business operations or products
supplied by the business. So, it basically provides insurance cover for third-party liabilities to
businesses who are involved in industrial and non-industrial activities.

If your business requires you to interact with the members of the public, like clients visiting
our business premises or your employees visiting your clients to deliver products or
services, public liability insurance can help you run your business smoothly by protecting you
against risks. While your insurer takes care of the claims from the third party and all the
expenses associated with the legal process, you can go ahead with running your business
without worrying about these issues.

Although holding this insurance is not a legal requirement in many countries, it is prudent to
go for it as without such an insurance, your business might face costly compensation
payments. Moreover, the insurance is also good for the future prospects of your business, as
some trading authorities may require you to have some kind of public insurance in place.

The public liability insurance is usually available for the following businesses -

1. Manufacturing & processing facilities

2. Construction activities
3. Godowns, warehouses, and storage facilities
4. Hotels, motels, clubs, restaurants, boarding & lodging house, guest houses
5. Office, residential and administration premises
6. Educational institutions
7. Public libraries
8. Medical establishments
9. Research institutions and laboratories
10. Airport premises excluding aviation liability
11. Cinema Halls, multiplexes, auditoriums, theatres, open air theatres, public halls, malls
12. Exhibition & fairs, stadiums, pandals, amusement parks
13. Any other industrial & non-industrial and non-manufacturing activities like IT
companies, BPOs, etc.

By paying additional premiums, the insurance can be extended to cover legal expenses that
can result from a few other activities like:

1. Accidental pollution

2. Transportation

3. Carriage of treated effluents

4.  Defence cost that has been covered with prior consent

5.  Benefit of retroactive date

6. Acts of God perils (some natural disasters)

The insurance, however, does not cover the following activities/situations-

1. Deliberate or willful non-compliance of any statutory provision

2. War

3. Ionizing radiations & nuclear group of perils

4. Injuries or damages to employees

5.  Losses of pure financial nature (eg. goodwill loss)

6. Fines, penalties, punitive and/or exemplary damages

7. Losses resulting from personal injuries (like libel and defamation) and infringement of
plans

If your business or company interacts with the public in any way, you should think about
getting your business insured against the claims of compensation for any injury or damage
suffered by the third party, due to accidents occurring in your business premises. The cost of
public liability insurance can vary to a great extent depending on factors like the size of your
business, the level of risk associated with the particular industry, the level of interactions
required with the public, and also, you claim history.