Liability insurance is a type of insurance that protects a policyholder in case they are taken to court for claims that are within the scope covered by the insurance policy.
It is part of the insurance system. It protects the policyholder from the risks of liabilities that are imposed by similar claims as well as lawsuits.
Initially, persons or organisations that faced a common risk came up with a group as well as a self-help fund. The fund would be used to pay compensation if any of the members incurred a loss.
The modern insurance system is reliant on companies that are dedicated to offering protection against specific risks. Liability insurance is created to provide specified protection against insurance claims by third parties. This means that payment is not made to the policyholder but to an individual who suffers a loss and is not a party to the contract.
Usually, liability insurance does not cover damages that are caused by individuals intentionally. Contractual liability is also not covered by a liability insurance policy.
When claims are made, the insurer is obliged to defend the policyholder. The costs that are incurred when claims are being made have no effect on the policy. However, some policies may pass the costs to the policyholder.
Insurers offering the liability insurance policy have several duties. These are:
- The duty to defend the insured.
- The duty to settle a claim that is reasonably clear.
- The duty to indemnify.
Insurers defend when a policyholder is taken before a court of law . The insured sends a cover letter along with a copy of the complaint. These refer to the relevant policy and demand that the insurer immediately defends the insured.
On receiving the documents, the insurer has several options. It can choose to defend, seek a declaratory judgment of no coverage, or refuse to do either. When the insurer seeks the declaratory judgement, the issue of its duty to defend a policyholder can be sorted out.
When an insurer opts to defend, it has to defend the policyholder under a rights’ reservation or it has waived the defence of no coverage. The insurance company can use its own lawyers or use an external law firm.
The duty to settle a claim that is reasonably clear exists in some jurisdictions. The duty is very important in cases where compensation is equal to or more than the limits of the policy. The insurer has no other option but to settle the claim in such situations.
The insurer may choose not to settle the claim but if the case goes to court, the policyholder may be required to pay an amount of money that is more than the offer for settlement. Insurers will normally settle claims that are reasonably clear so as to avoid endangering the policyholder.
Failure to fulfil any of the duties can result in the insurer being held liable for breach of contract as well as the tort of bad faith.