A liability insurance policy offers to cover business owners, professionals, and self-employed people against the cost of compensation claims due to malpractice, injury, or negligence. So, let’s discuss what are the different types of liability insurance policies.
There are different types of liability insurance policies as mentioned below:
1) Commercial general liability (CGL) policy:
A CGL policy protects the businesses against the claims arising out of bodily injury and property damage arising out of:
- Premises
- Operations
- Products
- Completed operations
It also covers the losses caused due to advertising and personal injury.
Case Study:
A customer visits a construction company to look for sample flats for its newly constructed residential project. During the visit, the customer trips on the loose flooring and suffers a leg injury. The commercial general liability policy taken by the construction company covers the loss caused due to the medical expenses of the bodily injury of the customer.
2) Directors and Officers’ liability insurance:
It is a type of liability insurance that covers the directors and officers against the claims made by
- Employees
- Suppliers
- Competitors
- Regulators
- Customers
- Shareholders
- Other stakeholders
Case Study:
The dismissal of the four employees of the firm was based on cost-cutting measures, but the female employee filed a suit claiming that a particular director had always discriminated against her on the grounds of her gender.
Read More: Who is an Insured under Commercial General Liability Insurance?
However, upon investigation, it was clear that she was dismissed based on the cost-cutting measure of the firm. Thus, the director’s and officers’ liability insurance taken by the firm protected its director against the claims.
3) Professional indemnity insurance:
Professional Indemnity Insurance is a type of liability insurance that covers the businesses or individuals who provide advice or a professional service to clients. It covers the compensation claims when the business is sued by its clients for making a mistake.
Case Study:
An investment firm was approached by a client for giving investment advice. Upon implementation of the advice, the client suffered huge financial losses.
The professional indemnity insurance policy covered the investment firm for the losses suffered by the client and helped it to settle the claim.
4) Cyber risk insurance:
A cyber insurance policy is designed to help an organization or business cover against the liability and property losses arising due to any electronic activity that the business engages in. This policy helps to offset the risk involved with recovery, after a cyber-related security breach.
Case Study:
A dismissed employee of the IT company stole the names, addresses, and social security numbers from the customer files. So, he gave this information to a fraudulent person who in turn used it to obtain credit cards.
The affected customers filed a complaint against the IT company for their breach of identity. However, the cyber risk insurance policy obtained by the IT firm helped to settle the claims of the customers.
5) Commercial crime insurance:
A Commercial Crime Insurance policy offers to protect businesses against losses due to third-party fraud or employee fidelity. It protects the business against:
- Employee dishonesty
- Theft of money
- Burglary
- Robbery
- Forgery
- Computer fraud
Case Study:
An employee of a cable manufacturing company stole bundles of cables from the inventory which was later discovered at a salvage yard. The inventory was found in a damaged state.
The commercial crime insurance policy protected the business against the loss caused due to robbery.
6) Carrier legal liability insurance:
Carrier legal liability insurance covers the insured for the physical loss or damage to goods or merchandise directly caused by fire or/an accident to the vehicle while such goods or merchandise are in transit. It covers the losses of the goods or merchandise when they are in the custody of the insured.
Read More: How is the indemnity limit defined under Carrier Legal Liability Insurance?
Case Study:
A transportation company was in the business of transporting assignments of other companies to their destined locations. During one such transit, the goods of a small business owner were damaged due to the accident. However, the carrier’s legal liability insurance secured by the transportation company helped it to cover the financial loss caused to the business owner.
7) Product liability insurance:
Product liability insurance covers the business against claims arising with respect to its products and services. The claims may arise due to personal injury or property damage caused due to the products or services of the business.
Case Study:
A paint manufacturer imported the cardboard material required to produce color charts for different paints. However, the finished product of cardboard supplied by the vendor was of the sub-standard quality which caused the final coat of paint to appear a shade lighter. As a result, the paint manufacturer suffered losses and sued the vendor for the same. The product liability insurance policy of the vendor helped him cover the losses.
8) Trade credit insurance:
This insurance helps business owners to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency, or bankruptcy.
Case Study:
A steel company sells a large shipment of raw products to its major client company, which in turn makes other steel products and sells it in the market. In the case where the client company is unable to pay back to the steel manufacturer, due to loss of business, the trade credit insurance policy will cover the steel manufacturers for the portion of the debt.
So, different types of liability insurance, such as general liability, professional liability, and product liability, cater to specific business needs by providing coverage for different risks and potential liabilities, ensuring financial protection and peace of mind for businesses in their respective industries.
Professional liability insurance helps individuals or businesses meet their financial obligations, while workers compensation covers workplace injuries. Understanding the various types of insurance, for short term liabilities and long term debt, is crucial for managing contingent liability and ensuring comprehensive coverage for your financial responsibilities over the next 12 months.
Liability insurance is essential to mitigate financial risks. It includes accounts payable, unearned revenues, accrued expenses, and deferred taxes. Insurance coverage shields against unexpected liabilities and can reduce income tax liabilities, making it a vital component of sound financial planning for businesses.
