Liability Insurance: What You Need To Know


WRITTEN BY: Mark Romero

UPDATED: SEPTEMBER 27, 2022 | 1 MIN READ

Liability insurance, also known as third-party insurance, provides coverage if you’re responsible for injury/damage to another person or their property.

Its main purpose is to provide financial assistance to those who are legally obligated to pay money towards a lawsuit for an incident they were directly responsible for.

Personal liability insurance is a standard portion of homeowners insurance and can help cover the high expenses incurred from personal injury or property damage.

Liability Insurance Quick Summary

  • Liability insurance provides financial coverage for those held responsible for injury or damage to another person and their property. It can provide financial protection from high costs associated with lawsuits, settlements, and legal fees.
  • Many types of liability insurance are designed to deal with varying situations, including general, professional, and employer liability.
  • In standard homeowners insurance, personal liability policies are designed to protect property owners if a third party is injured at their residence or an object on their property causes damage to a third party.
  • This insurance can only be used for accidental circumstances and doesn’t provide coverage for intentional damage, contractual liabilities, or criminal prosecution.
  • If your liable expenses exceed the limit of your basic homeowners insurance policy, it’s possible to get extra coverage through an umbrella policy.

How Exactly Does Liability Insurance Work?

Liability insurance is essential for those who may be held responsible for injury or damage to another person and their property.

This can include anyone who owns a business or rental property, practices medicine or law, or owns a car. It works to provide financial protection from the high costs associated with legal settlements, medical bills, legal fees, or lost wages.

It benefits those actively sued for any damage/injury they were directly responsible for causing. Still, this type of insurance only applies if events occurred unexpectedly/by accident.

Provisions don’t cover intentional damages, contractual liabilities, and criminal prosecution.

What Are The Many Types of Liability Insurance?

Because this insurance can be useful for individuals in varying situations, many types are meant to deal with specific circumstances.

General Liability: covers businesses or individuals when faced with claims of property damage, bodily injury, or copyright infringement

Professional Liability: covers business owners or practitioners when errors are made in professional services (i.e., providing inaccurate medical information, filing taxes incorrectly, etc.)

Employer Liability/Workers Comp: covers employees suffering from work-related injuries or illnesses

Product Liability: provides coverage to product manufacturers if their product is faulty and causes damage or injury

Umbrella/Excess Liability: provides additional coverage if the claim’s dollar amount exceeds your home or auto insurance limit

What is Homeowners Insurance?

Homeowners insurance is a type of property insurance that covers any damages or losses to a residence. It can cover interior or exterior damage, damage caused to personal belongings or assets, and any injury acquired while on the property.

Personal Liability and Homeowners Insurance

While it’s possible to purchase stand-alone personal liability insurance, most homeowners insurance policies come with a personal liability portion.

In standard homeowners insurance, the personal liability policy protects you against bodily injury or property damage imposed on another person.

If someone gets injured on your property, liability coverage is there to help. Its purpose is to help cover the expenses incurred from any of the following:

Medical Bills

If someone is injured on your property and you/your negligence are found to be the cause, this insurance will cover their medical treatment.

Lost Wages

If someone is injured on your property and their injury prevents them from returning to work, this insurance will help pay for their lost wages.

Pain & Suffering

Suppose someone is injured in your home and decides to pursue a settlement case for their pain and suffering. In that case, liability insurance may help cover the payout you are legally responsible for. 

Death Benefits

While it’s unlikely that an accident on your property will be fatal, liability insurance may cover death benefit payouts to the deceased’s family if they pass away on your property.

If a lawsuit is filed against you after an incident, liability insurance will help you find a lawyer and cover the legal expenses.

Costs of Homeowners Personal Liability

Most standard homeowners insurance policies have a liability limit of $300,000 for property damage and bodily injury. Increasing this limit for an increased premium price may be possible, but it depends on your insurance provider.

It is generally inexpensive to purchase a higher limit, with those insured only paying between $150-$300 extra per year. Personal liability is considered supplemental coverage and can only be used if your basic policy cannot cover all expenses.

What is Not Covered Under Personal Liability?

Home personal liability insurance has its exclusions when it comes to coverage. Not every incident will be covered, and it’s important to know when those exclusions apply.

If you use your home as a place of business, incidents may not be covered by general liability policies and may need to be handled by employer liability insurance.

Purposefully inflicted injuries aren’t covered. Any bodily injury imposed upon you or your family within your home will not be covered by liability insurance.

Alternatives Beyond Personal Liability Coverage

After you’ve reached the limits of your basic home insurance policy, it’s possible to get extra coverage through an umbrella policy. It’s generally sold as separate coverage and will only be sold to you if you already have a personal liability portion of your homeowners insurance.

In addition to your standard homeowners policy, umbrella policies will provide coverage for eligible out-of-pocket expenses you’re expected to pay. The more financial assets you have, the more likely you will benefit from umbrella policies.