What Is Liability Insurance, and What Does It Cover?

You’re approaching a red light in your car. As you prepare to turn right, the car in front of you starts to turn while you look to your left to check for oncoming traffic. As you move through the turn, the car in front of you slams on the breaks and—BAM—you accidentally rear-end it.  

Sound familiar? It’s a common occurrence. 

It’s in these moments that you’re thankful you have liability insurance. (After all, they’re called “car accidents” for a reason.) Liability insurance comes standard with several types of policies—like car insurance. We’ll help you understand what liability insurance is and why it can be an important part of your overall financial plan.  

What is liability insurance?  

When you’re liable for an accident, you often are responsible for many of the expenses associated with addressing the accident (like medical expenses to treat someone’s injuries or repair costs to someone’s property). Liability insurance can help protect you financially in the event of an accident by helping to cover the expenses you’re liable for.  

What does liability insurance cover? 

Liability insurance can help cover expenses for injuries or damages that are the result of an accident you’re responsible for by law. If you rear-end someone (as in the example above), your liability insurance might cover repairs to the car you hit. If the driver of that car was injured, your policy might also cover medical expenses for any care that person needed. Or if someone tripped over some broken concrete in your driveway and broke an arm, liability insurance could cover medical expenses when you’re liable for the injury that occurred on your property.  

There are a number of events that could involve liability insurance, and there are different types of policies that can include liability insurance, like car insurance, homeowners insurance and general liability insurance for a business.  

Why do I need liability insurance?  

Generally speaking, liability insurance helps to protect you from the financial consequences of an accident. No one plans for these things to happen, but when they do, you’ll be awfully glad to have insurance to help cover them.  

There may be other instances when you’d be required to carry liability insurance. In most states, you must have liability insurance to legally drive a car in that state. Liability insurance is also included in most homeowners insurance policies, and although there are no specific state laws that require you to carry homeowners insurance, many mortgage lenders will require that you carry it. (Some landlords may even require that you carry renters insurance as a renter.)  

What are the most common types of liability insurance? 

Liability insurance can be important in many different situations, which is why it is included in a number of different policies. Here are the main places you’ll usually see liability insurance:  

Personal liability insurance 

Policies can vary depending on which company your policy is through and what type of policy you have. But liability coverage is included in most auto, homeowners or renters insurance policies. 

• Automotive insurance: In an auto insurance policy, liability insurance would cover medical expenses for the other people involved in an accident or damages to their vehicle, as well as someone else’s property (like a fence, mailbox or structure). 

• Homeowners/Renters insurance: In a policy on a residence, liability insurance may cover any injuries to people (or property) that occur on your property that you’re legally liable for.  

• Special event insurance: If you’re organizing a large event (like a wedding or fundraiser), special event insurance could cover medical expenses for injuries to any guests or damages to the property you rented for the event.  

Business liability insurance 

There are many factors to consider when insuring a business, but generally speaking, most businesses carry some type of liability insurance to protect the business from events when property was damaged or people were injured. Business liability insurance can protect a business in situations like: 

• An injury to a customer that occurred on the business property. 

• Property damage to a home while the business was performing work (like a window breaking during a roof repair). 

• A lawsuit for injury to a person’s reputation (libel or slander). 

What does general liability insurance not cover?   

It’s important to read the details of your policy to make sure you understand what your specific policy covers. For example, in an automotive policy, liability insurance will likely cover damages to the other person’s car, but it won’t cover damages to your own vehicle. (If you want that covered, you’ll likely want to add collision or comprehensive coverage.) Liability insurance also wouldn’t cover any of your medical expenses or repairs if someone else was at fault. That individual’s policy should pick up those costs, but you also may want to carry underinsured motorist coverage in the event that the person’s insurance limits are lower than yours and don’t cover everything you need.  

For a business, general liability insurance generally will not cover all events a business may want to protect itself from. If an employee were to get into a car accident with a company vehicle, that would not be covered by general liability insurance. General liability insurance also doesn’t cover injury to workers while performing their job duties. While general liability insurance is an important part of a business’s insurance policy, it’s likely the business will carry other types of coverage in addition to liability insurance to make sure it’s fully covered.  

Should I get liability insurance?  

You may find yourself in situations—like wanting to drive a car or purchase a house—when you’ll have to get liability insurance. But whenever you make the decision to carry additional insurance, you’ll want to weigh the cost against the value of peace of mind, knowing that you’re protected, that you get in return. 

Any insurance—car insurance, disability insurance, life insurance—comes with a price, but when you find yourself in a situation when you need it, you’ll be glad you took the extra step to make sure you’re protected. If you’re unsure about which policies to carry and how much coverage you want, a financial advisor can be a helpful resource. A Northwestern Mutual financial advisor can help you weigh options you may be considering and suggest additional policies that may suit your situation and protect what you’ve built.