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TATA AIA Life Insurance Co. Ltd will send you updates on your policy, new products & services, insurance solutions or related information. Select here to opt-in. T&C apply.

What Is Liability Insurance And How Does it Work?

Liability insurance, a critical financial shield, covers individuals and business organisations against potential third-party liabilities and legal complications, ensuring continuity in professional or business activities in an unpredictable business world.
 

In a fast-paced business world, uncertainties and associated risks have continually been rising and sometimes distinct in different scenarios.
 

Whether you are an individual or a business organisation, seeking financial protection against assets and business operations has been a priority. 
 

Liability insurance is an insurance product that emerges as a suitable critical shield against incidents that can incur due to third-party liabilities.
 

Let us look at liability insurance meaning, its functionalities, and its importance in business.

What Is Liability Insurance?

Liability insurance provides financial protection for the insured, individual or an organisation against damages, injuries, or losses incurred to third parties or their properties. It provides financial coverage for the insured if they are found legally liable for the losses and can cover legal fees, medical expenditures, and other expenses related to a liability.
 

Liability insurance is considered an essential financial product for varied categories of people and organisations, especially those engaged in business activities such as construction, logistics, etc. 
 

For Micro, Small, And Medium Enterprises (MSMEs), SME insurance provides the necessary financial coverage based on the degree of risks involved. The SME insurance policy can be tailor-made to suit individual businesses to cover third-party liabilities' financial risks and ensure business operations continuity.

Key Features Of Liability Insurance

  • Liability insurance coverage provides financial security to an individual or business organisation.

  • It provides a financial shield against third-party bodily injuries, property damages, and other legal liabilities.

  • There are different liability insurance plans, such as Public Liability Cover, Directors And Officers Liability Insurance, Product Liability Insurance, Errors And Omissions Liability Insurance, etc.

How Does Liability Insurance Work?

Liability insurance protects people and business organisations against insured losses or damages. 
 

Liability Insurance Example

Consider an employer policyholder raising a claim against the liability insurance for a physical injury incurred to an employee while he was performing his daily activities. 
 

The insurer will verify the claim for the covered damages, business operations, and the genuineness of the scenario. If the liability insurance policy covers the loss and the liability policy period is effective, the insurer will pay for the losses, including the hospitalisation and medical expenses.
 

Therefore, it is essential to read and understand the liability insurance policy document for the types of damages or losses covered and the exclusions to make a valid claim. Also, it is vital to ensure that the liability policy period is active at any time and take the initiative for timely renewal.

Liability Insurance Coverage: Inclusions And Exclusions
 

 

Inclusions

Exclusions

Expenses incurred due to filing a lawsuit against the insured

Intentional damages or criminal activity, transportation of hazardous materials.

Expenses incurred as a fee for the hired lawyer or the investigation officer for being sued by a third party

Damages or losses incurred due to natural calamities such as earthquakes, floods, cyclones, etc. and due to war.

Any loss or damage to a third-party property

Penalties for not following the legal rules and regulations, libel and slander

Medical expenses incurred after an accident due to the insured person’s products or business operations that resulted in a third-party claim

Infringement of copyrights, trademarks, patents, etc.

Types Of Liability Insurance

Type Of Liability Insurance

Meaning

Who Should Purchase?

General Liability Insurance

General liability insurance provides financial coverage against wide-ranging third-party bodily injuries or property damages caused due to the insured’s products, services, or business operations. 

Any business organisation can purchase general liability insurance regardless of its size or industry.


Public Liability Insurance

Public liability insurance offers financial protection for business organisations that engage in frequent interactions with the general public. 
 

The coverage offers protection against potential financial risks and legal liabilities arising due to damages incurred to third parties in their premises or due to their operations.

Businesses such as restaurants, shopping malls, theatres, retail shops, clubs, etc., can purchase public liability insurance.


Product Liability Insurance

Product liability insurance covers manufacturers, sellers, or distributors against third-party or property damages incurred due to their products arising due to their design or manufacture. 

Businesses engaging in manufacturing or selling any kind of products, from small-scale to large corporations, can purchase product liability insurance for their financial security.

Directors And Officers (D&O) Liability Insurance

The D&O liability insurance offers financial protection for the Directors and Officers of a business organisation if they are alleged due to mismanagement in roles, gross negligence, conflict of interest, etc.

Public listed companies, private organisations, non-profit organisations, etc., can purchase D&O insurance to secure themselves against third-party legal complications.


Errors And Omission (E&O) Insurance

E&O Insurance offers financial protection to the insured against any negligence, errors, or omissions while delivering their professional service to a client. 

Individuals offering professional services, such as lawyers, accountants, architects, etc., can purchase the E&O liability insurance.

Employer Liability Insurance

Employer liability insurance covers financial liabilities that an employer can incur if an employee gets injured while working at their workspace. 

Any business organisation can purchase general liability insurance regardless of size or industry.

Why Should Individuals And Business Organisations Purchase Liability Insurance?

  • Financial Protection - Liability insurance provides financial protection against third-party liabilities. It helps individuals and organisations secure their cash reserves to focus on their business or professional goals. 

  • Legal Protection - In the case of third-party liabilities, certain specific scenarios can lead to filing lawsuits. In such cases, liability insurance coverage can help pay for the lawyer and other court proceedings.

  • Maintain Reputation - Liability insurance can help individuals and business organisations handle third-party issues timely and ensure the right compensation to maintain the reputation.

  • Peace Of Mind - Business organisations can function peacefully when they have liability insurance to ensure coverage for their third-party liabilities. It can help them focus better on their business and financial initiatives.

How To Raise A Liability Insurance Claim?

Here are the necessary steps to raise a liability insurance claim.
 

  1. Inform the insurance provider - Inform the insurance provider about the incident through the online or offline platform, whichever is applicable and convenient.

  2. Apply for the liability insurance claim - Apply for the claim by filling out the necessary details in the claim form issued by the insurance provider.

  3. Gather the important documents - Find the necessary documents required to raise the claim, such as the medical report, First Information Report (FIR), photographs, proof of identity, proof of residence, etc., and submit them to the insurance provider.

  4. Help the surveyor investigate the scenario - The insurance provider will assign a surveyor to examine the situation for further proceedings. Cooperate with the surveyor by providing the necessary details, answering the queries, and arranging other required documents. 

  5. Track the liability insurance claim - Upon successful investigation, the insurance provider will verify the liability insurance coverage and the claim settlement process. Track the claim status and provide further details if there is a discrepancy. 
     

    The insurance provider will inform about the disbursement of the funds if the process is through verification.

Wrapping Up

Liability insurance emerges as a significant safeguard against potential risks and legal uncertainties, providing the insured with the required financial protection. It provides financial security, the assurance of legal defence, and the flexibility to pursue professional and business goals without the fear of unexpected liabilities. Getting well-versed with the liability insurance policy conditions, types, and premiums is crucial to making a well-informed financial decision. Embark on a secure journey with liability insurance coverage for every professional or business goal!

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions (FAQs)

Is purchasing liability insurance mandatory for a small organisation?

Purchasing liability insurance is not mandatory for a small organisation unless the work environment is hazardous. However, it is considered beneficial for securing financial reserves and ensuring business continuity.

What is the difference between personal liability insurance and business liability insurance?

Personal liability insurance protects individuals against third-party liabilities, and business liability insurance covers the financial interests of companies and business organisations against similar incidents.

What factors affect the liability insurance premium?

The key factors that affect the liability insurance premium are:

  • Industry

  • Type and range of potential risks

  • Size of the organisation

  • Location

  • Types of business operations

  • Type of products or services offered

  • Type of liability insurance coverage

  • Claims history

  • Financial and business records of the organisation

Disclaimers

  • Insurance cover is available under the product.

  • The products are underwritten by Tata AIA Life Insurance Company Ltd.

  • The plans are not guaranteed issuance plans, and they will be subject to Company’s underwriting and acceptance.

  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.

  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.

  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.