Liability insurance is a part of the commercial insurance which is there to protect the purchaser of the policy (i.e. policyholder) from the various risks of liabilities which can arise from lawsuits and similar claims. There are various types of liability insurance policies, like cyber risk, directors & officers’ liability insurance, product liability, etc. If we talk about commercial general liability insurance, which is also one of the parts of liability insurance, the policy offers protection against claims which may arise due to bodily injury or damages caused to the third-party’s property for which your business may be held responsible.
The policy plays a crucial role by offering protection in case of a wide range of liability loss exposure which may be faced by various companies. In most of the cases, a commercial general liability insurance acts as a foundation for most of the company’s liability insurance plans.
Similarly, if you work in a technology-driven industry, you can have a professional liability insurance which safeguards against litigation charges which may arise from professional negligence. The professional negligence can result in software failure, loss of client’s data, the disclosure of client’s confidential information, etc.
Such liability insurance policies are designed to offer you complete protection in case of third-party claims. It means the payment is not basically made to the policyholder but rather to someone else who suffers losses due to your actions and who is not the part of the insurance contract also.
However, in any case, liability insurance will not cover those losses or damages which are caused intentionally along with contractual liability.
In case of liability insurance policies, the insurance company has two or three major duties, as stated below, which primarily depends upon their jurisdiction as well-
- The duty to defend
- The duty to indemnify the policyholder
- The duty to settle the claim
When a claim is filed against the policyholder, the insurance company defends the policyholder and covers legal costs of a defence. Usually, the legal costs of a defence are not limited unless the same is explicitly mentioned in the policy document.
Incepted in 1999, K.S Engineering is a pioneer name in the engineering field. It is the sheer hard work of its over 200 employees that the company has maintained a wide clientele base, which includes foreign companies as well.
Last year, the company grabbed a huge deal of exporting engineering items worth Rs 1 crore. As per the agreement, the company had to export goods to a buyer situated in Maldives. As the contract was huge, the buyer insisted on physical inspection of goods. As agreed, the buyer visited K.S Engineering’s warehouse in Pune to check the quality of items. While inspecting the consignment in the factory, the buyer tripped over the power cord and caused severe damages to his right leg and back.
It was the prime responsibility of K.S Engineering to ensure the complete safety of its workplace, however, it failed to ensure the safety. Here, the buyer filed a case against K.S Engineering who, fortunately, had bought commercial general liability insurance policy. As soon as the case reached the court, K.S Engineering approached the insurer who appointed a surveyor to inspect the cause and extent of losses or damages. Here, the verdict in the court was given in favour of the buyer and K.S Engineering was asked to pay compensation.
The general liability insurer found the claim legitimate and therefore, settled the claim on behalf of K.S Engineering, which included both the compensation and legal costs. As K.S Engineering incurred legal expenses in defending itself in the court, the insurer also settled the legal expenses.
The commercial general liability insurance paid the compensation on behalf of K.S Engineering and thus saved it from a heavy financial loss.