Liability insurance differs from other types of insurance because it compensates someone other than the person who takes out the policy. In one way, it covers the owner of the policy from losing his or her own money. So for example, if a person has a car accident, the insurance allows the driver to protect his assets, in most cases, and the other injured parties would first have access to the amount of liability for which the driver is insured. Some common examples include liability insurance for drivers or businesses, and malpractice insurance.
Other types of car insurance, like collision and comprehensive, allow the insured person to submit a claim to cover the damages to his car. If the driver is hurt in a car accident, collision insurance must pay for health care in most cases, even if the person caused the accident. Further, if his car is damaged in some way other than in a collision, comprehensive insurance will pay for repairs.
In the US, many states require drivers to carry a set amount of liability insurance to cover damage they might inflict on another person, his car, and his property. Generally, people who are making payments on a vehicle must also cover collision and comprehensive insurance so that the bank that owns the loan is protected if the borrower totals his or her car. Many people who own their cars outright also carry liability, collision, and comprehensive insurance to protect themselves from losses in accidents.
Liability insurance is purchased in set amounts, and costs more for more coverage. It will not always protect the policyholder completely from possible lawsuits. Some types, like that which might be purchased by heads of corporations, can protect the holder's personal finances from being part of a lawsuit. When a driver, a member of a corporation, or a medical professional acts illegally, however, liability may not cover all damages. So for example, the doctor who causes injury to a patient because he was working while intoxicated is likely to be sued for much more than his or her covered malpractice insurance.
Another type of insurance carried by people who have a great deal of assets is personal umbrella insurance. This is often purchased in large amounts, like millions of dollars of liability, and it tends to match the policyholder's assets closely. Once again, this type of insurance will pay for harm done to other people and protect the insured person's assets. It will not pay for harm to the policyholder himself.
In all cases, liability insurance serves two purposes. It protects the holder's bank account and covers the injuries of others. A history of past accidents, malpractice, or poor business practices can greatly increase the cost of this type of insurance.