Liability Insurance Definition

There are different types of liability coverage, but all pay out if you’re financially responsible after an accident or lawsuit.
Ben Moore
By Ben Moore 
Edited by Caitlin Constantine

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.

MORE LIKE THISAuto Insurance

Liability insurance pays out if you’re financially responsible for injuring a person or damaging their property. It protects people and businesses from lawsuits from a third party, whether that be for damage after an at-fault crash or a faulty product shipped out from a business.

Liability coverage can be found in both personal and business insurance policies. Here are some common types.

Personal liability coverage

If you’ve ever bought a car or homeowners insurance policy, you’ve probably come across the liability coverage section in your policy. For example, a home insurance policy includes liability coverage that pays if you injure someone or cause property damage by accident or through neglect.

However, you may associate liability insurance with an auto policy. Below are some types of personal liability coverage you could come across.

Bodily injury liability coverage is a common component of an auto insurance policy that pays out if you injure other people in a car accident you caused.

Property damage liability coverage is also common for auto insurance policies. It pays out if you damage another person’s car or property in a crash in which you’re at fault.

Umbrella insurance provides extra liability coverage if you’re sued for a damage amount higher than the liability limits of another policy, such as an auto or homeowners policy.

Business liability coverage

If you’re a small-business owner, you’ve likely purchased liability coverage to protect your operation. Below are some common types of business liability coverage and what they cover.

General liability insurance covers legal costs if your business harms or is accused of harming another person or their property.

Professional liability insurance covers legal and settlement costs due to lawsuits from dissatisfied customers.

Product liability insurance financially protects a business if the company’s product causes physical injury or property damage.

Get more smart money moves – straight to your inbox
Sign up and we’ll send you Nerdy articles about the money topics that matter most to you along with other ways to help you get more from your money.