Basics of Legal Liability - General Insurance (Liability Insurance)

Legal Liability :- In simple terms, legal liability is the legal responsibility of a person to pay compensation for any damages incurred. Legal liabilities are usually determined by the court even if they are settled mutually among the parties outside the court.

Classification of Legal Liability :- Legal liability may be classified into two categories.

1. Criminal Liability :- It is enforced by the state, resulting into punishment in the form of fine or imprisonment or both.

2. Civil Liability :- Here action is brough by one party against another and dealt with according to law, resulting in payment of damages or compensation to the aggrieved party.

Insurance coverage is provided only for civil liability claims. Any liability arising out of criminal act cannot be covered under insurance. 

Civil Liability :-

• It may arise under common law which may be defined as a body of law consisting of past court decisions, customs and usages recognized by court. Example :- A person may be liable to pay damages to another person under common law for negligently causing bodily injury and/or property damage.
• Civil Liability may also arise under statutory law, i.e. under an act of Parliament. Example:- Under Workmen's Compensation Act 1923, the employer, irrespective of his negligence, may be liable to his employees who meets with an accident whilst at work.
• Civil Liability may also arise under a contact between two parties. Example:- A builder has made a contract with the owner to complete his building within a stipulated period. If the contractor fails to complete the building on time, then he has a civil liability to the owner.

Liability Insurance :- It can be classified into two types based on the category of liability covered.

• Insurance Covering Statutory Liability i.e. liability defined by a specific law example:- Workmen's Compensation Act, Motor Vehicle Act, Indian Steamships Act, Public Liability Act etc. 
• Insurance Covering Tort Liability i.e. common law judgments Example:- Public Liability, Professional Liability, Product Liability etc.  

Liability Insurance is more commonly classified as :

• Property and Casualty Liability i.e. acts of negligence resulting in loss or damage to property or death or injury of third party.
• Financial Liability i.e. negligence resulting in financial losses to third parties e.g. Professional Liabilities, Directors and Officers Liability etc.

The purpose of liability insurance is to provide indemnity to the insured in respect of the financial consequences of legal liabilities. The damages or compensation may become payable whenever any such liability arises under the law.