What Does Legal Liability Mean?
Legal liability is a person or entity’s legal responsibility under the law. If a person or entity (such as a company) does not uphold this responsibility, they may be sued. The court proceedings may find the person or entity liable for paying the complainant for bodily injury, property damage, lost wages, etc. Lawsuits can cost substantial amounts of money, sometimes in the millions.
In the context of insurance, people and businesses commonly purchase liability insurance either as a separate policy or as included in the standard insurance policy package. This coverage protects them against liability imposed against them for bodily injury, death, or damage to property arising from their actions or inactions.
For example, a grocery store may purchase commercial general liability insurance. With this insurance, if a customer slips in the produce section because the floor is wet, resulting in a broken leg, and then decides to sue the store, a liability policy will cover the legal costs associated with the lawsuit. In addition to covering the cost to go through the legal process itself, the coverage will pay out any damages, such as the customer’s medical expenses and lost wages.
Legal liability insurance comes standard with most property and auto insurance. For example, in the case of a car accident, the insurance would pay to fix the vehicle as well as any physical property damage or bodily injury the accident may have caused. The legal liability portion of the policy would pay to fix the fence the car drove through and the medical bills of the vehicle’s other occupant. The physical damage coverage would pay to fix the responsible party’s vehicle (minus the deducible).
Insuranceopedia Explains Legal Liability
Legal liability can extend beyond the physical space of one’s property or vehicles. For example, if a business sells products, it has a legal liability to ensure the products are safe for use. The business owner is responsible for any injuries or losses that the product causes, even after it leaves the store.
Additionally, with a home insurance policy, the legal liability follows the owner anywhere in the world — if a policyholder accidentally lights their hotel room on fire while on vacation, the legal liability portion of their home insurance will pay for any damages caused to the hotel.
While legal liability comes standard with $1–$2 million in coverage on most policies, purchasing an umbrella policy can also be helpful. This policy provides higher levels of property damage and bodily injury coverage. It may also include coverage for libel, slander, mental anguish or other personal lawsuits. The legal liability limit for an umbrella policy can range from $3–$10 million, depending on the provider.
For example, say a person purchased a condo insurance policy with $1 million in legal liability coverage, an auto insurance policy with $2 million legal liability coverage and a $3 million umbrella policy. Then, say a fire destroyed a portion of the condo complex, originating in the insured’s unit from a pot on the stove. The total cost of damages to the other units totaled $2.5 million. The insured’s condo insurance would pay for damages to their own unit and the legal liability coverage plus the umbrella coverage would cover the damages to the other units. The insured’s condo coverage would cover the first million and the umbrella policy would cover the rest. This coverage is recommended for those with high-value assets, those with multiple assets and those that face a high risk of being sued.
Because of the rising cost of building material and labor as well as the high rate of personal injury lawsuits, it is recommended to assess legal liability policy limits each year with a broker or agent to ensure protection from financial loss.