In many countries, liability insurance is a compulsory form of insurance for those at risk of being sued by third parties for
negligence. The most usual classes of mandatory
policy cover the drivers of motor vehicles (
vehicle insurance), those who offer professional services to the public, those who manufacture products that may be harmful, constructors and those who offer employment. The reason for such laws is that the classes of
insured are deliberately engaging in activities that put others at risk of
injury or loss.
Public policy therefore requires that such individuals should carry insurance so that, if their activities do cause loss or damage to another, money will be available to pay
compensation. In addition, there are a further range of perils that people insure against and, consequently, the number and range of liability policies has increased in line with the rise of
contingency fee litigation offered by lawyers (sometimes on a
class action basis). Such policies fall into several different classes:
Public liability Industry and commerce are based on a range of processes and activities that have the potential to affect third parties (members of the public, visitors, trespassers, sub-contractors, etc. who may be physically injured or whose property may be damaged or both). It varies from
state to state as to whether either or both employer's liability insurance and public liability insurance have been made compulsory by law. Regardless of compulsion, however, most organizations include public liability insurance in their insurance
portfolio even though the conditions, exclusions, and warranties included within the standard policies can be a burden. A company owning an industrial facility, for instance, may buy
pollution insurance to cover lawsuits resulting from environmental accidents. Many small businesses do not secure general or professional liability insurance due to the high cost of premiums. However, in the event of a claim, out-of-pocket costs for a legal defence or settlement can far exceed premium costs. In some cases, the costs of a claim could be enough to shut down a small business. Businesses must consider all potential risk exposures when deciding whether liability insurance is needed, and, if so, how much coverage is appropriate and cost-effective. Those with the greatest
public liability risk exposure are occupiers of premises where large numbers of third parties frequent at leisure including shopping centres, pubs, clubs, theatres, cinemas, sporting venues, markets, hotels, and resorts. The risk increases dramatically when consumption of alcohol and sporting events are included. Certain industries such as security and cleaning are considered high risk by underwriters. In some cases underwriters even refuse to insure the liability of these industries or choose to apply a large deductible in order to minimise the potential compensations. Private individuals also occupy land and engage in potentially dangerous activities. For example, a rotten branch may fall from an old tree and injure a pedestrian, and many people ride bicycles and skateboards in public places. The majority of states require motorists to carry insurance and criminalise those who drive without a valid policy. Many also require insurance companies to provide a
default fund to offer compensation to those physically injured in accidents where the driver did not have a valid policy. In many countries, claims are dealt with under
common law principles established through a long history of
case law and if litigated, are made by way of civil actions in the relevant jurisdiction.
Product liability Product liability insurance is not a compulsory class of insurance in all countries, but legislation such as
the EC Directive on Product Liability (25/7/85) and the UK's
Consumer Protection Act 1987 create a strict liability regime "without fault", and businesses manufacturing or supplying goods often carry some form of product liability insurance, usually as part of a combined liability policy. The scale of potential liability is illustrated by cases such as those involving
Mercedes-Benz for unstable vehicles and
Perrier for
benzene contamination, but the full list covers pharmaceuticals and medical devices, asbestos, tobacco, recreational equipment, mechanical and electrical products, chemicals and pesticides, agricultural products and equipment, food contamination, and all other major product classes.
Employers and workers compensation Laws regarding workers compensation, which compensate an
employee, vary by country, but the Workers’ Accident Insurance system put into place by
Otto von Bismarck in 1881 is often cited as a model for Europe and later the United States. In many legal jurisdictions workers compensation is compulsory depending upon the business, including the United Kingdom and many states of the United States with the notable exception of Texas as of 2018. Regardless of compulsory requirements, businesses may purchase insurance voluntarily, and in the United States policies typically include Part One for compulsory coverage and Part Two for non-compulsory coverage. Original jurisdiction over workers' compensation claims has been diverted in much of the United States to administrative proceedings outside of the federal and state courts. They operate as no-fault schemes in which the employee need not prove the employer's fault; it is sufficient for the employee to prove that the injury occurred in the course of employment. If a third party other than the employer actually caused the injury, then the workers' compensation insurer (or self-insured employer) who is ordered to pay an employee's claim is usually entitled to initiate a subrogation action in the regular court system against the third party. In turn, workers' compensation insurance is regulated and underwritten separately from liability insurance. Just as the Insurance Services Office develops standard liability insurance forms and obtains approval for them from state insurance commissioners, the National Council on Compensation Insurance (NCCI) and various state rating bureaus provide similar services in the workers' compensation context. U.S. workers' compensation insurance generally covers only bodily injury to and death of employees, but it does not always cover other persons who may suffer injury as a direct result of such bodily injury or death. U.S. employers often carry Employers' Liability coverage (which is not necessarily compulsory) to protect themselves from lawsuits from such persons who would still have the right to sue them in the courts, such as an employee's spouse who claims
loss of consortium as a result of the employee's bodily injury on the job which was allegedly caused by the employer's negligence.
Personal liability Personal liability or
private liability insurance covers claims that are made against the policy holder (and often also against other members of their household), usually limited to a private context. They commonly cover claims arising from private accidents such as damaging someone's personal property, or from traffic accidents when not driving a motor vehicle. Personal liability insurance usually excludes claims that arise from professional activity (such as causing an accident at work), and claims that are covered by a more specific insurance, such as the liability insurance for a home or a motor vehicle. Particularly risky activities are also sometimes excluded, such as driving a motor boat or riding a horse. Personal liability is sometimes offered as a separate contract, and sometimes as a part of another insurance policy, such as
home insurance.
Management and employment practices liability Workers' compensation also does not cover intangible torts that merely cause emotional distress, or torts arising from management negligence and liability to shareholders. General management liability coverage may include directors and officers (D&O) liability insurance, employment practices liability (EPL) insurance, fiduciary liability insurance, and "special crime" insurance (kidnap, ransom, and extortion), either individually or as part of a cohesive package. Employment practices liability arose in the 1980s, after U.S. employees began to obtain jury verdicts against their employers due to workplace actions such as
wrongful dismissal.
Insurance Services Office (ISO), a vendor of
standard form contract insurance policies, revised the Commercial General Liability insurance policy form to exclude coverage for torts related to the employer-employee relationship like racial or gender discrimination in the workplace, as well as liability for negligent supervision of midlevel managers who committed such torts. Thereafter, specific policy forms were created to cover this specific risk.
Excess insurance Excess insurance is a type of liability insurance that provides coverage for losses exceeding the limits of an underlying primary
insurance policy. Unlike primary
insurance, which responds first to a claim up to its specified limit, excess insurance activates only after the primary coverage is exhausted, offering additional financial protection against significant or catastrophic losses. For example, if a primary
auto insurance policy has a liability limit of $100,000 and a claim amounts to $150,000, an excess policy with a $50,000 limit would cover the remaining $50,000 after the primary policy pays out. Excess insurance is commonly used in personal and commercial contexts and is distinct from
umbrella insurance, though the terms are sometimes confused in casual usage. In British English, "excess" also refers to a
deductible—the amount a policyholder pays out-of-pocket before insurance kicks in—but here it denotes additional coverage layers. Excess insurance can take several forms, depending on its structure and purpose: •
Stand-Alone Excess Policies: These have their own terms, conditions, and exclusions, independent of the primary policy. They are tailored to specific risks or higher limits. •
Follow-Form Excess Policies: These mirror the terms and coverage of the underlying primary policy, only extending the financial limit. They are common in commercial insurance. Excess insurance differs from
umbrella insurance. While both provide coverage above primary limits, umbrella policies often broaden the scope of coverage (e.g., including risks not covered by the primary policy), whereas excess insurance typically adheres to the primary policy's scope, only increasing the monetary ceiling. == General liability ==