Liability insurance coverage refers to a third-party liability policy. A third-party liability policy “provides coverage for liability of the insured to a ‘third party.’” Liability insurance is based on the ideas of fault, proximate cause, and duty. In property insurance, for example, coverage for various events is based on what is included or excluded in the contract. However, in liability insurance, the insured is covered for his or her own negligence (Montrose Chemical Corp. v. Admiral Ins. Co.). In other words, liability insurance compensates a third party for damage caused by the negligence of the insured. For example, one may have liability insurance for one’s car, meaning that if he/she gets into an automobile accident and injures someone, the liability insurance will compensate the injured person.
[Last updated in July of 2020 by the Wex Definitions Team]