Liability Insurance

Daisy Rogozinsky
June 13, 2022

If you are in a position where you may be sued for damages or injuries, it is usually recommended to take out a liability insurance policy. In this article, we’ll define liability insurance and explain how it connects to bankruptcy, auto accidents, DUIs, medical malpractice, and personal injury law.

Key Takeaways

  • Liability insurance protects an individual or business against claims for injuries or damage to others or others’ property
  • Liability insurance proceeds are usually not included in a bankrupt debtor’s bankruptcy estate
  • Motor vehicle drivers are usually required by law to carry auto liability insurance
  • Auto liability insurance may not always cover damages caused by an individual driving under the influence
  • Healthcare professionals often carry medical malpractice liability insurance to cover them for claims of negligence made by patients
  • Property owners and renters may carry personal injury liability insurance to cover them for claims made by people injured on their property

What Is Liability Insurance?

Liability insurance is a form of insurance that protects a party against claims for injuries or damage to other people or other people’s property. If the insured party is found legally liable for damages, liability insurance will cover legal costs and payouts. However, liability insurance does not cover intentional or criminal acts. 

Liability insurance is unique because it pays a third party, not the policyholder themselves. This is why it is sometimes called third-party insurance.

Liability insurance is required or highly recommended for certain parties who can be sued for damages or injuries such as:

  • Drivers of automotive vehicles
  • Product manufacturers
  • People in the legal profession
  • People in the medical profession
  • Business owners
  • High-net-worth individuals 

Liability Insurance in Bankruptcy Law

When a party files for bankruptcy, some of their assets are added to a bankruptcy estate that is liquidated to pay off their debts. At the same time, an automatic stay is put into place to stop debt collection efforts from their creditors. This raises the question of whether liability insurance proceeds are included in the bankruptcy estate.

The answer is that proceeds of standard liability insurance policies are not included in the bankruptcy estate because the intended beneficiary is not the debtor but rather a third party. Because of this, bankruptcy courts often lift automatic stays so that a creditor can initiate or continue legal proceedings against the debtor to collect proceeds from insurance policies. 

Liability Insurance in Auto Accident Law

In most states, drivers of motor vehicles are required to carry liability insurance to cover them for damage they cause with their vehicle to other people and other people’s property. Essentially, if a driver is responsible for an accident, liability insurance pays for the damages that they owe to the other parties. 

There are two types of liability auto insurance: bodily injury liability coverage and property damage liability coverage. Most states require drivers to have both. 

Liability Insurance in DUI Law

Liability auto insurance policies cover drivers for negligent conduct. However, they do not cover intentionally reckless driving. Some insurance companies consider driving under the influence to be an intentional act, meaning they will not cover drivers who cause an accident while under the influence. Even if it does, the driver's premium is likely to go up or they may have their policy canceled entirely in states in which it is legal for insurance companies to do so. 

Liability Insurance and Medical Malpractice

Because medical malpractice is relatively common, most healthcare providers carry malpractice insurance, a type of liability insurance covering them in case a patient files a lawsuit against them. Malpractice insurance covers healthcare professionals for claims of negligence, intentionally harmful treatment decisions, and death. They will pay medical damages, punitive damages, and any legal costs incurred by malpractice lawsuits. 

Liability Insurance and Personal Injury Law

Property owners, renters, and businesses often opt to get personal injury liability insurance which covers them if they are held legally responsible for causing injury to another party. If a person is injured on somebody else’s property on purpose or by accident, the property owner or renter may be held legally liable and be required to pay damages. Personal injury liability insurance policies can cover these damages as well as legal fees.

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