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Liability
insurance is a part of the general insurance system of risk
transference. Originally, individuals or 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. The
modern system relies on dedicated carriers to offer protection
against specified perils in consideration of a premium. Liability
insurance is designed to offer specific protection against third
party 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 and
contractual liability are not covered under liability insurance
policies. When a claim is made, the insurance carrier has the right
to defend the insured. The legal costs of a defense are not affected
by any policy limits, which is useful because they can be
significant where long trials are held to determine either fault or
the amount of damages.
In many
countries, liability insurance is a compulsory form of insurance for
those at risk of being sued by third parties for negligence. The
most usual classes of mandatory policy cover the drivers of
vehicles, those who offer professional services to the public, those
who manufacture products that may be harmful, and those who offer
employment. The reason for such laws is that the classes of insured
are deliberately engaging in activities that put others at risk of
injury or loss. Public policy therefore requires that such
individuals should carry insurance so that, if their activities do
cause loss or damage to another, money will be available to pay
compensation. In addition, there are a further range of perils that
people insure against and, consequently, the number and range of
liability policies has increased in line with the rise of
contingency fee litigation offered by lawyers (sometimes on a class
action basis). Such policies fall into three main classes:
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