Liability Insurance, type of insurance used to cover the risk of incurring legal liability to pay money damages. Such insurance guarantees financial protection to an insured party who might be required to pay damages resulting from negligence. The negligent act may be one that causes personal injury, death, or property damage. Liability for negligence may result not only from the conduct of the insured but also from the conduct of his or her agents and employees. Acts of negligence resulting in liability occur in connection with a wide variety of private and commercial activities, such as the operation of a motor vehicle, the conduct of a business, and the ownership or occupancy of the property. Liability insurance sometimes is called third-party insurance, because the insurance company protects the insured against suit by a third party, that is, the claimant.
A policy of liability insurance generally provides for investigation, negotiations for private settlement of claims, the defence of suits brought against the insured, and the payment of judgements or judicially approved settlements up to the limits specified in the policy. Ordinarily, the assistance and cooperation of the insured is required in the defence against the claim.
Since legal liability may arise in many situations, liability policies usually do not assume all the risks of liability.