Is liability insurance a good method of risk management?


Since there is always the possibility that one will incur liability for the injuries or damages sustained by others, buying liability insurance is an excellent method of personal risk management. Liability policies are designed to protect an individual's overall finances from claims made by other people.

Liability Insurance Characteristics

  1. Third-party losses, such as bodily injury or property damage, must be present in order for an insurer to defend the insured.
  2. If a defendant is determined liable for any third-party losses, they will be required by court to pay damages to the plaintiff. The following types of damages can be awarded to the plaintiffs:
    • Compensatory damages provide monetary compensation for all injuries and damages incurred by the third party. Compensatory damages include specific damages, intended to reimburse the harmed party for all material losses, and general damages intended to compensate the victim for non-material losses, such as pain and suffering.
    • Exemplary, or punitive, damages are imposed on the defendants, which aim at discouraging other people from following their example.
  3. All types of damages can be awarded in the same lawsuit, especially if both bodily injury and property damage have occurred as a result of negligence.
  4. The coverages provided by a liability insurance policy are specified in the insuring agreement. In liability insurance, companies typically agree to protect the assets of an insured by paying the damages for third-party losses (up to certain liability limits specified in the insuring agreement) on behalf of the insured. Third-party losses include bodily injury, property damage and in some cases, personal injury, such as privacy violation, slander, libel, etc. (not to be mistaken for bodily injury).
  5. A legal claim against the insured has to be filed by the third party, in order for an insurer to pay on behalf of the insured.
Was this question and its answer useful?
Not a bit
  • Currently 3/5 Stars
  • 1
  • 2
  • 3
  • 4
  • 5
Very useful
Have a question about insurance? Ask the experts