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What is liability insurance?

Liability insurance differs from all other types of insurance because the individual making the claim is not party to the insurance policy or contract. In such a situation, the insured is known as the first party, the insurer the second party and the claimant is referred to as the third party. The claimant has no contract with the insurer but may take action if liability arises.

Liability policies are written on either an accident or occurrence basis. On an accident basis, the injury must be inflicted due to an event that is sudden, unintended or unexpected. An example would be your dog jumping the fence into the neighbours’ yard and biting their child. In the case of an occurrence basis, the injury must be over a period of time but still unintended or unexpected. An example would be chemicals seeping into drinking water over an extended period of time.

Liability for injury and damage can arise from a number of different sources such as personal acts, property ownership, services performed or information said or written.

There are two types of liability insurance -- umbrella and professional liability insurance. Umbrella liability insurance protects the insurer if they are held liable for injury or property damage and is used to cover claims in excess of existing basic insurance. Some issues that might be covered by umbrella insurance include slander, libel or damage to borrowed property. These policies are called excess policies because they insure over the limits insured in your homeowners, car or other types of insurance. Most insurance companies will not issue an umbrella policy unless your basic home and car insurance is purchased through them.

Many professionals such as investment advisors, accountants, insurance agents, architects and engineers purchase professional liability insurance to protect against losses from errors, omission and negligence.