Liability insurance
Liability insurance (also called third-party insurance) is a part of the general insurance system of risk financing to protect the purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy.
Originally, individual companies that faced a common peril formed a group and created a self-help fund out of which to pay compensation should any member incur loss (in other words, a mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit, to offer protection against specified perils in consideration of a premium.
Liability insurance is designed to offer specific protection against third-party insurance claims, i.e., payment is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract. In general, damage caused intentionally as well as contractual liability are not covered under liability insurance policies. When a claim is made,[1] the insurance carrier has the duty (and right) to defend the insured.
The legal costs of a defence normally do not affect policy limits unless the policy expressly states otherwise; this default rule is useful because defence costs tend to soar when cases go to trial. In many cases, the defense portion of the policy is actually more valuable than the insurance, as in complicated cases, the cost of defending the case might be more than the amount being claimed, especially in so-called "nuisance" cases where the insured must be defended even though no liability is ever brought to trial.
Insurable risks[edit]
Generally, liability insurance covers only the risk of being sued for negligence or strict liability torts, but not any tort or crime with a higher level of mens rea. This is usually mandated by the policy language itself or case law or statutes in the jurisdiction where the insured resides or does business.
In other words, liability insurance does not protect against liability resulting from crimes or intentional torts committed by the insured. This is intended to prevent criminals, particularly organised crime, from obtaining liability insurance to cover the costs of defending themselves in criminal actions brought by the state or civil actions brought by their victims. A contrary rule would encourage the commission of crime, and allow insurance companies to indirectly profit from it, by allowing criminals to insure themselves from adverse consequences of their own actions.
Crime is not uninsurable per se. In contrast to liability insurance, it is possible to obtain loss insurance to compensate one's losses as the victim of a crime.
In the technology industry[edit]
Because technology companies represent a relatively new industry that deals largely with intangible yet highly valuable data, some definitions of legal liability may still be evolving in this field. Technology firms must carefully read and fully understand their policy limits to ensure coverage of all potential risks inherent in their work.[27]
Professional liability insurance typically protects technology firms from litigation resulting from charges of professional negligence or failure to perform professional duties. Covered incidents may include errors and omissions that result in the loss of client data, software or system failure, claims of non-performance, negligent overselling of services, contents of a forum post or email of an employee that are incorrect or cause harm to a reputation, getting rid of office equipment such as fax machines without properly clearing their internal memory, or failing to notify customers that their private data has been breached. For example, some client companies have won significant settlements after technology subcontractors’ actions resulted in the loss of irreplaceable data. Professional liability insurance generally covers such payments and legal defense within policy limits.
Additionally, client contracts often require on-site technology subcontractors to provide proof of general liability and professional liability insurance.